Decision-Making Under Risk Concepts

This tutorial covers decision-making under risk using probabilities. It explains the concepts of Expected Monetary Value (EMV) and Expected Value of Perfect Information (EVPI). The tutorial demonstrates how to calculate EMV for different investment options like bonds, stocks, and mutual funds, and how to determine the best investment choice. It also explains the significance of EVPI and how to calculate it, highlighting the value of having perfect information before making a decision.

What is decision-making under risk often referred to as?

• Decision-making with certainty

• Decision-making with probabilities

• Decision-making with ambiguity

• Decision-making with intuition

What does the Expected Monetary Value (EMV) represent?

• The sum of all possible outcomes

• The highest possible profit

• The average profit weighted by probabilities

• The lowest possible loss

How is the EMV for Bonds calculated?

• 0.2 x 53 + 0.5 x 45 + 0.3 x -5

• 0.2 x 70 + 0.5 x 30 + 0.3 x -13

• 0.2 x 40 + 0.5 x 45 + 0.3 x 5

• 0.2 x 60 + 0.5 x 50 + 0.3 x 10

Which investment option has the highest EMV?

• Stocks

• Bonds

• Real Estate

• Mutual Funds

What does EVPI stand for?

• Expected Value of Predictive Information

• Expected Value of Partial Information

• Expected Value of Perfect Information

• Expected Value of Probable Information

What does EVPI help determine?

• The maximum profit possible

• The value of additional perfect information

• The minimum risk involved

• The average expected loss

How is EVPI calculated?

• EV with PI x EV without PI

• EV with PI + EV without PI

• EV with PI - EV without PI

• EV without PI - EV with PI

What is the EV with perfect information in this scenario?

• 38

• 31.6

• 32

• 25.1

What is the EV without perfect information?

• 32

• 38

• 31.6

• 25.1

What is the calculated EVPI in this example?

• 6

• 5

• 7

• 8