Exhibit 14.3
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%.
-Refer to Exhibit 14.3. What decision should be made according to the expected monetary value decision rule?
A) A
B) B
C) C
D) Bank

Question

Exhibit 14.3
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%. 
-Refer to Exhibit 14.3. What decision should be made according to the expected monetary value decision rule?
A) A 
B) B 
C) C 
D) Bank

Quizplus · Accepted Answer

The expected monetary value (EMV) decision rule involves calculating the weighted average of all possible outcomes, where the weights are the probabilities of different states of nature. The option with the highest EMV is chosen. Without the specific details from Exhibit 14.3, we can't calculate the EMVs directly, but the correct answer indicates that option C has the highest expected monetary value among the given choices.

Exhibit 14.3 The Following Questions Are Based on the Information Below