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 analysis, good decisions
A) always result in good outcomes
B) always result in bad outcomes
C) guarantee good outcomes
D) may be reached when the model accounts for unforeseeable circumstances

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 analysis, good decisions
A) always result in good outcomes 
B) always result in bad outcomes 
C) guarantee good outcomes 
D) may be reached when the model accounts for unforeseeable circumstances

Quizplus · Accepted Answer

Good decisions may be reached when the model accounts for unforeseeable circumstances. In this case, the investor should consider the probabilities and potential payoffs of each investment in both an expanding and declining economy before making a decision. The decision tree provides a framework for analyzing this information and making an informed decision.

Exhibit 14.5 The Following Questions Are Based on the Information Below