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%.
-The decision with the smallest expected opportunity loss (EOL) will also have the
A) smallest EMV.
B) largest EMV.
C) smallest regret.
D) largest regret.

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%. 
-The decision with the smallest expected opportunity loss (EOL) will also have the
A) smallest EMV. 
B) largest EMV. 
C) smallest regret. 
D) largest regret.

Quizplus · Accepted Answer

The decision with the smallest expected opportunity loss (EOL) will have the largest EMV. Therefore, the best choice would be investment B, which has the highest EMV out of all the options.

Exhibit 14.5 The Following Questions Are Based on the Information Below