Question 1

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Question 1 (4 + 2 = 6 marks)
Mr. Jones is attempting to determine where he should invest $100,000 that he has won in a lottery. He has narrowed his choices down to three investment funds a,, a2, and a3.
The events of interest are the various states of the economy. You have constructed the following payoff table showing the various alternatives, states of nature and payoffs.
, S, (Recession) $1 000 -$2 000 -$10 000 Sz (stable economy) $4 000 $7 000 $8 000 (Economy improves) $8 000 $12 000 $15 000
You estimate the probability of the various states of nature as:
State of Nature Recession Stable economy Economy improves Probability 0.2 0.5 0.3
(a) Calculate the Expected Profit (EMV) for each possible fund. What fund would you invest in, on the basis of maximising the expected profit?
(b) Calculate the Expected Value of Perfect Information (EVPI) for this decision-making scenario.