The expected monetary value method, Mathematics

Assignment Help:

The expected monetary value method

The expected pay off as profit associated with a described combination of act and event is acquired by multiplying the pay off for that act and event combination by the probability of occurrence of the described event. The expected monetary value or EMV of an act is the sum of all expected conditional profits associated along with that act

Illustration

A manager has a choice among

i.        A risky contract promising of shs 7 million along with probability 0.6 and shs 4 million along with probability 0.4 and

ii.      A diversified portfolio consisting of two contracts along with independent outcomes each promising Shs 3.5 million along with probability 0.6 and shs 2 million along with probability 0.4

Could you arrive at the decision by using EMV method?

Solution

The conditional payoff table for the problem may be constructed as given below:

(Shillings in millions)

Event Ei

Probability (Ei)

Conditional pay offs decision

Expected pay off  decision

 

(i)

Contract (ii)

Portfolio(iii)

Contract (i) x (ii)

Portfolio (i) x (iii)

Ei

0.6

7

3.5

4.2

2.1

E2

0.4

4

2

1.6

0.8

 

 

 

EMV

5.8

2.9

 

By using the EMV method the manager must go in for the risky contract that will yield him a higher expected monetary value of shs 5.8 million


Related Discussions:- The expected monetary value method

Find the interval of validity for the solution, Solve the subsequent IVP an...

Solve the subsequent IVP and find the interval of validity for the solution xyy' + 4x 2 + y 2 = 0,       y(2) = -7,          x > 0 Solution: Let's first divide on both

Negative skewness-measure of central tendency, Negative Skewness It i...

Negative Skewness It is an asymmetrical curve whether the long tail extends to the left NB: In developed countries this frequency curve for the age distribution is charact

Explain the common forms of linear equations, Explain the Common Forms of L...

Explain the Common Forms of Linear Equations ? An equation whose graph is a line is called a linear equation. Here are listed some special forms of linear equations. Why should

Saxon math, what is the are of a square that is 2 inches long and 2 inches...

what is the are of a square that is 2 inches long and 2 inches wide?

What is multiplying fractions, What is Multiplying Fractions ? The rule...

What is Multiplying Fractions ? The rule for multiplying fractions is to "multiply across": Multiply the numerators to get the numerator of the answer. Multiply the den

first person drawn was named the class president, Consider a class of 55 s...

Consider a class of 55 students. The student names are placed in a hat & 3 names are randomly drawn without replacement. a)     If the first person drawn was named the class presi

Find the equation to the pair of lines - coordinate geometry, 1. Find the n...

1. Find the number of zeroes of the polynomial y = f(x) whose graph is given in figure. 2 Find the circumcentre of the triangle whose vertices are (-2, -3), (-1, 0) and (7,-6).

Algebraic models, Establish appropriate algebraic models for each of the fo...

Establish appropriate algebraic models for each of the following sets of data. You can use technology to assist. Plot them on grids and demonstrate how you have established each mo

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd