Sec3_midtermreview_07

# Sec3_midtermreview_07 - Section 3: Midterm Review EWMBA...

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September 1, 2007 Section 3 Midterm Review 1 Section 3: Midterm Review EWMBA 201A Rob Seamans

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September 1, 2007 Section 3 Midterm Review 2 Administrative Stuff 1. Prior midterms are on class website: http://faculty.haas.berkeley.edu/wolfram/201a/index07.html 2. Mid-Term Exam is on Tuesday (9/4) in Andersen Auditorium. 3. No section next weekend (9/8).
September 1, 2007 Section 3 Midterm Review 3 Review Topics 1. Decision Trees 2. Certainty Equivalence 3. Market Analysis 4. Thought Questions

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September 1, 2007 Section 3 Midterm Review 4 Tips for Decision Trees 1. Start by writing down the CHOICE and CHANCE nodes that you see in the question. 2. Try to see relationships among nodes; which come first? Which come later or are dependent on earlier choices/chances? 3. Make sure nodes are mutually exclusive (probabilities sum to 1) 4. After you have a good tree, calculate EVs from right to left (e.g. like Catherine’s mother-in-law; plan backwards)
September 1, 2007 Section 3 Midterm Review 5 Tips for Certainty Equivalence 1. Translate word problems into two options: one with certain payout and one with risky payout (and calculate the EV of this risky payout). 2. Observe decision maker’s choice and apply the following rules to get range of CE: 1. If decision maker rejects the option with the certain payout, then her CE is strictly greater than that payout; 2. If decision maker accepts the option with the certain payout, then her CE is less than or equal to that payout. 3. Compare CE range to EV of the risky payout to determine risk preference: 1. CE<EV risk averse 2. CE=EV risk neutral 3. CE>EV risk seeking

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September 1, 2007 Section 3 Midterm Review 6 2005 Decision Tree Question a. Draw decision tree and calculate EV (see answer solutions). Note for future reference that EV = \$1.1M.
September 1, 2007 Section 3 Midterm Review 7 2005 Decision Tree Question a. If Goodwyn were risk averse, might she have made a different decision than the one you found in part a? Why or why not? First think of the intuition: Goodwyn originally took a risky option when

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## This note was uploaded on 09/15/2009 for the course EWMBA 201A taught by Professor Wolfram during the Fall '07 term at University of California, Berkeley.

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Sec3_midtermreview_07 - Section 3: Midterm Review EWMBA...

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