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

Evaluate this integral value, The base of a right cylinder is the circle in...

The base of a right cylinder is the circle in the xy -plane with centre O and radius 3 units. A wedge is obtained by cutting this cylinder with the plane through the y -axis in

Least common denominator of rational expression, Perform the denoted operat...

Perform the denoted operation.                    (4/6x 2 )-(1/3x 5 )+(5/2x 3 ) Solution For this problem there are coefficients on each of term in the denominator thus

Fundamental sets of solutions, The time has at last come to describe "nice ...

The time has at last come to describe "nice enough". We've been using this term during the last few sections to explain those solutions which could be used to form a general soluti

Find out the x-y coordinates of the points - tangents, Find out the x-y coo...

Find out the x-y coordinates of the points in which the following parametric equations will have horizontal or vertical tangents. x = t 3 - 3t        y = 3t 2 - 9 Solut

Normal approximation to binomial to approximate probability, A certain flig...

A certain flight arrives on time 78% of the time. Suppose 1000 flights are randomly selected. Use the normal approximation to the binomial to approximate the probability that a)

Can u please tell me how to solve, a triangle with side lengths in the rati...

a triangle with side lengths in the ratio 3:4:5 is inscribed in a circle of radius 3.what is the area of the triangle.

Horizontal asymptote, The horizontal asymptote of (16x+7)(x^2-5)/(x^2+36).

The horizontal asymptote of (16x+7)(x^2-5)/(x^2+36).

Rotational symmetry .., write down the order of rotational symmetry of the ...

write down the order of rotational symmetry of the rectangle

Describe the sample of exponents , Describe the Sample of Exponents ? I...

Describe the Sample of Exponents ? Imagine, for example, that you are the P.E. coach at your school, and you need to divide one of your classes into teams. Your team has 45 stu

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