1. Develop an opportunity loss table given the payoff table in the example below
ID: 3044987 • Letter: 1
Question
1. Develop an opportunity loss table given the payoff table in the example below:
payoff table:
STATE OF NATURE
DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY
Stock Market 80,000 -20,000
Bonds 30,000 20,000
CDs 23,000 23,000
Probability 0.5 0.5
loss table:
DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY
Stock Market
Bonds
CDs
Probability 0.5 0.5
*What decision/alternative would minimize EOL?
a) EOL (stock) =
b) EOL (bonds) =
c) EOL (cds) =
d) What is the minimum EOL?
e) What is the decision/alternative?
Explanation / Answer
Ans:
First,make opportunity loss table,by choosing maximum in resective scenario and subtracting rest of entries of respective columns from them.
expected opportunity loss for stock market is minimum i.e. 21500
a)EOL(stock)=0*0.5+43000*0.5=21500
b)EOL(bonds)=50000*0.5+3000*0.5=26500
c)EOL(CDs)=57000*0.5+0*0.5=28500
d)As,EOL for stock market is minimum.
e)so best aletrnative will be stock market.
Good Poor Stock market 80000 -20000 Bonds 30000 20000 CDs 23000 23000 Opportunity loss table Good Poor EOL Stock market 0 43000 21500 Bonds 50000 3000 26500 CDs 57000 0 28500Related Questions
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