Suppose we are interested in investing in one of three investment opportunities:

Question

Suppose we are interested in investing in one of three investment opportunities: d1, d2, or d3.
The following profit payoff table shows the profits (in thousands of dollars) under each of the 3 possible economic conditionss1, s2, and s3.
The probability of the occurrence of s1 is 0.1, and the probability of the occurrence of s2 is 0.3.
Determine the expected value of decision d1, d2, and d3.

State of Nature

Decision

s1

     s2

   s3

d1                                             

18                                                        

28                                                  

30

d2

19

17

-5

d3

3

40

16

State of Nature

Explanation / Answer

expected value is the probability nultiplied by the value so

d1= 0.1*18+0.3*28+0.6*30 = 28.2

d2 = 0.1*19+0.3*17+0.6*(-5)=4

d3 = 0.1*3+0.3*40+0.6*16=21.9

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