Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. 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 decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-In decision-making, luck
A) often plays a role in determining whether good or bad outcomes occur
B) can be quantified
C) cannot be quantified
D) can be ignored

Question

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. 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 decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. 
-In decision-making, luck
A) often plays a role in determining whether good or bad outcomes occur 
B) can be quantified 
C) cannot be quantified 
D) can be ignored

Quizplus · Accepted Answer

Luck often plays a role in determining whether good or bad outcomes occur, which means that there is uncertainty in the payoff of each investment because it is tied to the economic climate. Therefore, the best choice would depend on the level of risk aversion of the investor and their preference for potential returns versus potential losses. Without more information about the investor's preferences, it is impossible to determine the best choice.

Exhibit 14.5 The Following Questions Are Based on the Information Below