Question

An investor has a choice between four investments. The profitability of the investments depends upon the market. The payoff table is given below for different market conditions.

	State of Nature
Investment	Market Increases	Market Stays the Same	Market Decreases
A	100,000	70,000	20,000
B	70,000	30,000	-20,000
C	40,000	25,000	-10,000
D	30,000	30,000	30,000

A market economist has stated that there is a 20% chance that the market will stay the same, a 50% chance that the market will decrease, and a 30% chance that the market will increase. If a market economist is 100% correct, compute expected value with perfect information (EVwPI).

Group of answer choices

9,000

59,000

54,000

5,000

Answer 1

	State of nature
	Market increases	Market stays the same	Market decreases
Probability of state	0.3	0.2	0.5
Investment
A	100000	70000	20000
B	70000	30000	-20000
C	40000	25000	-10000
D	30000	30000	30000
Expected return on investment A		sum of probability of state*payoff
Expected return on investment A		100000*.3 + 70000*.2 + 20000*.5
Expected return on investment A		54000
Expected return on investment B		sum of probability of state*payoff
Expected return on investment B		70000*.3 + 30000*.2 - 20000*.5
Expected return on investment B		17000
Expected return on investment C		sum of probability of state*payoff
Expected return on investment C		40000*.3 + 25000*.2 - 10000*.5
Expected return on investment C		12000
Expected return on investment D		sum of probability of state*payoff
Expected return on investment D		30000*.3 + 30000*.2 + 30000*.5
Expected return on investment D		30000
The expected return on A		54000
The expected return on B		17000
The expected return on C		12000
The expected return on D		30000
The investment A has the highest expected payoff.
The expected value of investment A is $54000.