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

How to subtract fractions with the same denominators, Q. How to Subtract fr...

Q. How to Subtract fractions with the same denominators? Ans. Subtracting fractions is basically the same as adding them. If you don't know how to add fractions, you shoul

Rules for partial derivatives, Rules for Partial Derivatives ...

Rules for Partial Derivatives For a function, f = g (x, y) . h (x, y) = g (x, y)   + h

Calculate the investment - apr 4 percent, Suppose you start saving today fo...

Suppose you start saving today for a $55,000 down payment that you plan to make on a house in 7 years,  assume that you make no deposits into the account after the initial deposit,

What is the expected value of perfect information, Question: The follow...

Question: The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature. (a) Construct a decision tr

Find the constant height at which the jet is flying, The angle of ...

The angle of elevation of a jet fighter from a point A on the ground is 600. After a flight of 15 seconds, the angle of elevation changes to 300. If the jet is flying at a speed  o

Activity example of one to one correspondence learning, Devise one activity...

Devise one activity each to help the child understand 'as many as' and 'one-to-one correspondence'. Try them out on a child/children in your neighbourhood, and record your observat

Cartesian graph of density of water - temperature, Cartesian Graph of Densi...

Cartesian Graph of Density of Water - Temperature: Example:  The  density  of  water  was  measured  over  a  range  of  temperatures.   Plot the subsequent recorded data on

Take home test, what is 36 percent as a fraction in simplest form

what is 36 percent as a fraction in simplest form

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