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

Differential equations, Find the normalized differential equation which has...

Find the normalized differential equation which has {x, xex} as its fundamental set

Numbers, use the distributive law to write each multiplication in a differe...

use the distributive law to write each multiplication in a different way. then find the answer. 12x14 16x13 14x18 9x108 12x136 20x147

What is the probability a 3 will be rolled and a tail tossed, A die is roll...

A die is rolled and a coin is tossed. What is the probability that a 3 will be rolled and a tail tossed? Find the probability of each event separately, and then multiply the an

PROBLEM SOLVING, The perimeter of a rectangular swimming pool is 60m. The l...

The perimeter of a rectangular swimming pool is 60m. The length of the pool is 4 m more than the width. What is the width of the pool?

Proportions Ratios, Give me an example , please : 1 over 2 , 14 over twenty...

Give me an example , please : 1 over 2 , 14 over twenty-eight

What is the probability in which she gets heads further flip, Jennifer ?ipp...

Jennifer ?ipped a coin three times and got heads each time. What is the probability in which she gets heads on the further ?ip? The probability of heads does not modify based o

Prove - digraph of a partial order has no cycle more than 1, Prove that the...

Prove that the Digraph of a partial order has no cycle of length greater than 1. Assume that there exists a cycle of length n ≥ 2 in the digraph of a partial order ≤ on a set A

Trigonometry, Prove: cotA/2.cotB/2.cotC/2 = cotA/2+cotB/2+cotC/2

Prove: cotA/2.cotB/2.cotC/2 = cotA/2+cotB/2+cotC/2

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