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

Invertible Matrices - Logical equivalence, 10 statements must be shown to b...

10 statements must be shown to be logically equivalent to the Statement the nxn matrix is invertible.

The appropriate resource constraint, Consider a person's decision problem i...

Consider a person's decision problem in trying to decide how many children to have. Although she cares about children and would like to have as many as possible, she knows that chi

Kurtosis-measure of central tendency, Kurtosis - It is a concept, whic...

Kurtosis - It is a concept, which refers to the degree of peakedness of a described frequency distribution. The degree is generally measured along with reference to general di

Complementary addition model, E1) How is the 'comparison model' different...

E1) How is the 'comparison model' different from the 'complementary addition model'? E2) Create one word problem related to the children's world for each of the 4 models liste

Right- and left-handed limits , Right- and left-handed limits : Next, let'...

Right- and left-handed limits : Next, let's see precise definitions for the right- & left-handed limits. Definition   For the right-hand limit we say that, if for eve

Statistics, How do you calculate for the distance between two co-ordinates?...

How do you calculate for the distance between two co-ordinates?

Repetition need not be boring-ways to aid learning maths, Repetition Need N...

Repetition Need Not Be Boring :  From an early age on, children engage in and learn from repetitive behaviour, such as dropping and picking up things, opening and closing boxes an

Find how much more space than the toy it will cover, A Solid toy in the for...

A Solid toy in the form of a hemisphere surmounted by the right circular cone of height  2cm  and  diameter  of  the  base  4  cm .If  a right  circular  cylinder circumscribes the

Solid mensuration, what is the importance of solid mensuration?

what is the importance of solid mensuration?

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