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%.
-A square node in a decision tree is called a(n) ____ node.
A) chance
B) random
C) decision
D) event

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%. 
-A square node in a decision tree is called a(n) ____ node.
A) chance 
B) random 
C) decision 
D) event

Quizplus · Accepted Answer

According to the decision tree, the highest expected payoff is associated with choosing investment C, which has an expected value of $750,000. Choosing any other investment leads to a lower expected payoff.

Exhibit 14.5 The Following Questions Are Based on the Information Below