Exhibit 14.14
The following questions use the Decision Tree model and strategy table information below.
-An investor is considering 2 investments, A, B, which can be purchased now for $10. There is a 40% chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly. If A grows rapidly the investor can cash it in for $80 or trade it for investment C which has a 25% chance of growing to $100 and a 75% chance of reaching $80. If A grows slowly it is sold for $50. There is a 70% chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly. If B grows rapidly the investor can cash it in for $100 or trade it for investment D which has a 20% chance of growing to $95 and an 80% chance of reaching $80. If B grows slowly it is sold for $45. What is the multistage decision for this investor and what is the EMV for this decision?

Question

Exhibit 14.14
The following questions use the Decision Tree model and strategy table information below.  
-An investor is considering 2 investments, A, B, which can be purchased now for $10. There is a 40% chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly. If A grows rapidly the investor can cash it in for $80 or trade it for investment C which has a 25% chance of growing to $100 and a 75% chance of reaching $80. If A grows slowly it is sold for $50. There is a 70% chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly. If B grows rapidly the investor can cash it in for $100 or trade it for investment D which has a 20% chance of growing to $95 and an 80% chance of reaching $80. If B grows slowly it is sold for $45. What is the multistage decision for this investor and what is the EMV for this decision?

Quizplus · Accepted Answer

The Answer of Exhibit 14.14
The following questions use the Decision Tree model and strategy table information below.  
-An investor is considering 2 investments, A, B, which can be purchased now for $10. There is a 40% chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly. If A grows rapidly the investor can cash it in for $80 or trade it for investment C which has a 25% chance of growing to $100 and a 75% chance of reaching $80. If A grows slowly it is sold for $50. There is a 70% chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly. If B grows rapidly the investor can cash it in for $100 or trade it for investment D which has a 20% chance of growing to $95 and an 80% chance of reaching $80. If B grows slowly it is sold for $45. What is the multistage decision for this investor and what is the EMV for this decision?

Exhibit 14.14 The Following Questions Use the Decision Tree Model and Strategy