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Extra Problem 8 - Value of Perfect Information - EMGT 269...

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EMGT 269 - Elements of Problem Solving and Decision Making Instructor: Dr. J. R. van Dorp 1 EXTRA PROBLEM 8 VALUE OF PERFECT INFORMATION Mister Smith is trying to decide between investing $10,000 windfall into a savings account at a 10% yearly interest rate or a new stock. The return on the new stock is linked in part to the overall stock market behavior as exhibited by the DOW JONES INDEX. If the DOW JONES INDEX increases on the average during the year then there is a probability of 0.8 that the stock value will increase. If the DOW JONES INDEX decreases on the average during the year, then there is a probability 0.3 that the stock will increase. The probability that the DOW JONES INDEX increases on the average during the coming year is 0.55. The net payoff in one year on the investment of $10,000 for these events is as follows STOCK VALUE Increase Decrease DOW JONES INDEX Increases $8,000 -$5,000 DOW JONES INDEX Decreases $2,000 -$10,000 That is, if the DOW JONES INDEX increases on the average during the year and
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