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

Unit normal vector - three dimensional space, Unit Normal Vector - Three Di...

Unit Normal Vector - Three Dimensional Space The unit normal vector is illustrated to be, N (t) = → T' (t) / (|| T → ' (t)||) The unit normal is orthogonal or normal or

Real numbers, prove root 2 as irrational number

prove root 2 as irrational number

Determine centigrade equivalent for a temperature, 1. 10 -2 is equal to ...

1. 10 -2 is equal to 2. If 3n = 27, what is the value of (4n) + 1 3. What is 1/100 of 10000? 4. The formula C=5/9 x (F-32) converts Centigrade temperature from Fa

Find the area of the remaining part of cardboard, From a sheet of cardboard...

From a sheet of cardboard in the shape of a square of side 14 cm, a piece in the shape of letter B is cut off. The curved side of the letter consists of two equal semicircles & the

Revenue and profit functions, Now let's move onto the revenue & profit func...

Now let's move onto the revenue & profit functions. Demand function or the price function Firstly, let's assume that the price which some item can be sold at if there is

How much does it car cost her per year, Ashley's car insurance costs her $1...

Ashley's car insurance costs her $115 per month. How much does it cost her per year? Multiply $115 by 12 because there are 12 months in a year; $115 × $12 = $1,380 per year.

How to converting fractions to decimals explain with example, How to Conver...

How to Converting Fractions to Decimals explain with example? To convert fractions to decimals, divide the numerator by the denominator. The quotient is the decimal. Ex

Algebra, Evaluate: 30 - 12÷3×2 =

Evaluate: 30 - 12÷3×2 =

Linear programming, what is the advantage of dual linear problem programmin...

what is the advantage of dual linear problem programming when we maximize profit then what is need to minimize cost of the same problem

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