The expected monetary value method, Mathematics

The expected monetary value method

The expected pay off as profit associated with a described combination of act and event is acquired by multiplying the pay off for that act and event combination by the probability of occurrence of the described event. The expected monetary value or EMV of an act is the sum of all expected conditional profits associated along with that act

Illustration

A manager has a choice among

i.        A risky contract promising of shs 7 million along with probability 0.6 and shs 4 million along with probability 0.4 and

ii.      A diversified portfolio consisting of two contracts along with independent outcomes each promising Shs 3.5 million along with probability 0.6 and shs 2 million along with probability 0.4

Could you arrive at the decision by using EMV method?

Solution

The conditional payoff table for the problem may be constructed as given below:

(Shillings in millions)

Event Ei

Probability (Ei)

Conditional pay offs decision

Expected pay off  decision

 

(i)

Contract (ii)

Portfolio(iii)

Contract (i) x (ii)

Portfolio (i) x (iii)

Ei

0.6

7

3.5

4.2

2.1

E2

0.4

4

2

1.6

0.8

 

 

 

EMV

5.8

2.9

 

By using the EMV method the manager must go in for the risky contract that will yield him a higher expected monetary value of shs 5.8 million

Posted Date: 2/19/2013 2:45:49 AM | Location : United States







Related Discussions:- The expected monetary value method, Assignment Help, Ask Question on The expected monetary value method, Get Answer, Expert's Help, The expected monetary value method Discussions

Write discussion on The expected monetary value method
Your posts are moderated
Related Questions
#k1=f(Tn, Xn), k2=f (Tn + H.Y,Xn + H.Y.k1) Xn+1=Xn + H(a.k1+ b.k2) Find a relation between Y,a and b so that the method is second order consistent.

if the ratio of boys to girls ism 3 to 5, then what percent of the students are boys

An investment advisory firm manages funds for its numerous clients. The company uses an asset allocation model that recommends the portion of each client's portfolio to be invested

In the introduction of this section we briefly talked how a system of differential equations can occur from a population problem wherein we remain track of the population of both t

Explain the Graphical Technique of Linear Equations.


EXPLAIN ME ABOUT ITS FUNCTIONS.

Relative measures of dispersion Definition of Relative measures of dispersion: A relative measure of dispersion is a statistical value that may be utilized to compare va

A garden in the shape of a rectangle is surrounded through a walkway of uniform width. The dimensions of the garden only are 35 by 24. The field of the garden and the walkway toget