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

Binding constraints for the original linear program model, A toy company pr...

A toy company produces 2 models of water guns: spray king and zapper. They are manufactured in batches for easier packaging and sale. Two of the limiting resources are 1200 pounds

the jetstream''s speed, A passenger jet took 3 hours to fly 1800 km in the...

A passenger jet took 3 hours to fly 1800 km in the direction of the jetstream. The return trip against the jetstream took four hours. What was the jet's speed in still air and the

Solution by factorization, Solution by Factorization, please solve quadrati...

Solution by Factorization, please solve quadratic equations by Factorization.

Fermats theorem, Fermat's Theorem  If f(x) has a relative extrema at x...

Fermat's Theorem  If f(x) has a relative extrema at x = c and f′(c) exists then x = c is a critical point of f(x). Actually, this will be a critical point that f′(c) =0.

Find the perimeter and the area of the shaded portion, The given figure con...

The given figure consists of four small semicircles and two big semicircles.  If the smaller semicircles are equal in radii and the bigger semicircles are also equal in radii, find

Explain introduction to non-euclidean geometry, Explain Introduction to Non...

Explain Introduction to Non-Euclidean Geometry? Up to this point, the type of geometry we have been studying is known as Euclidean geometry. It is based on the studies of the a

The normal approximation to the binomial , A certain flight arrives on time...

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

Positive integer, (a)   Specify that  the sum of  the degrees  of all verti...

(a)   Specify that  the sum of  the degrees  of all vertices of a graph  is double the number of edges  in  the graph.                            (b)  Let G be a non directed gra

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