Wesley Taylor Considering Investing Money Inherited Following Payoff Table Gives Profits W Q34307227

Wesley Taylor is considering investing some money that heinherited. The following payoff table gives the profits that wouldbe realized during the next year for each of three investmentalternatives Wesley is considering:

STATE OF Nature
DECISION
ALTERNATIVE

GOOD

ECONOMY

POOR

ECONOMY

Stock Market
$110,000
-50,000

Bonds

   40,000   30,000
CDs
   43,00043,000Probability0.60.4

REQUIRED:
a.   What decision would maximize expected profit?
b.   What is the maximum amount that should be paid for aperfect forecast of the economy?

Expert Answer

Ans a)

The EMV or Expected monetary value of ‘Stockmarket’ decision alternative = 0.6 * 110,000 + 0.4 *(-50,000) = $46,000

The EMV or Expected monetary value of ‘Bonds’decision alternative = 0.6 * 40,000 + 0.4 * 30,000 = $36,000

The EMV or Expected