The expected monetary value method, Mathematics

Assignment Help:

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


Related Discussions:- The expected monetary value method

Leptokurtic-measure of central tendency, Leptokurtic a) A frequency di...

Leptokurtic a) A frequency distribution which is lepkurtic has normally a higher peak than that of the general distribution. The coefficient of kurtosis while determined will

Logs, log4^(x+2)=log4^8

log4^(x+2)=log4^8

Determine the conditional probability, Consider a class of 55 students. The...

Consider a class of 55 students. The student names are placed in a hat and 3 names are randomly drawn without replacement. a) If the first person drawn was named the class presi

Illustration of rank correlation coefficient, Illustration of Rank Correlat...

Illustration of Rank Correlation Coefficient In a beauty competition two assessors were asked to rank the 10 contestants by using the professional assessment skills. The resul

Area of an ellipse, You know the experation for the area of a circle of rad...

You know the experation for the area of a circle of radius R. It is Pi*R 2 . But what about the formula for the area of an ellipse of semi-minor axis of length A and semi-major

Determine and classify all critical points , Determine and classify all the...

Determine and classify all the critical points of the given function.  Described the intervals where function is increasing & decreasing. Solution: Firstly we'll require

Explain basic geometric concepts, Explain Basic Geometric Concepts ? P...

Explain Basic Geometric Concepts ? Points, lines, and planes are the most fundamental concepts in the study of geometry. Points A point has no length, width or heig

Percentage, By selling a violin for $4950, giving a 10% discount on the mar...

By selling a violin for $4950, giving a 10% discount on the marked price, a trader gained $950 on his investment, Find, Cost price.

Logs, the variables x and y are thought to be related by a law of the form ...

the variables x and y are thought to be related by a law of the form ay^2=(x+b)lnx Where a and b are unknown constants. Can a and b be found and how.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd