{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Sec3_midtermreview_09

# Sec3_midtermreview_09 - Section 3 Midterm Review EWMBA 201A...

This preview shows pages 1–7. Sign up to view the full content.

September 5, 2009 Section 3 Midterm Review 1 Section 3: Midterm Review EWMBA 201A Eva Vivalt

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
September 5, 2009 Section 3 Midterm Review 2 Administrative Stuff 1. Prior midterms are on bspace. 2. Mid-Term Exam is on Tuesday (9/8). 3. Both cohorts take it then; no lecture on Monday.
September 5, 2009 Section 3 Midterm Review 3 Review Topics 1. Decision Trees 2. Certainty Equivalence 3. Market Analysis 4. Questions (especially Thought Questions)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
September 5, 2009 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.
September 5, 2009 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 loving

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
September 5, 2009 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.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}