Question

In Problem 3-22, you helped Allen Young determine the best investment strategy. Now, Young is thinking about paying for a stock market newsletter. A friend of Young said that these types of letters could predict very accurately whether the market would be good, fair, or poor. Then, based on these predictions, Allen could make better investment decisions. (a) What is the most that Allen would be willing to pay for a newsletter

Answer 1

Allen would be willing to pay for a newsletter at about $200.

Stock market:

$((1400 x 0.4) + (800 x 0.4) + (0 x 0.2)) = $880

Bank deposit:

$((900 x 0.4) + (900 x 0.4) + (900 x 0.2)) = $900

Maximum Expected monetary value is $900

$((1400 x 0.4) + (900 x 0.4) + (900 x 0.2)) = $1100

Expected value with perfect information is : $1100-900 = $200

EVI- $200 (THE AMOUNT ALLEN WOULD BE WILLING TO PAY)

Attached is the table

Answer 2

Answer:

$200

Explanation:

solution:

table is attached

EMV solution:

stock market

$1400*0.4+800*0.4+0*0.2 = $880

bank deposit

$900*0.4+900*0.4+900*0.2 = $900

max EMV is $900

EVI solution : expected value - max(EMV)

=$1400*0.4+900*0.4+900*0.2

=$200