5 Rollo Megabux has $1 million to invest in stocks or bonds. The percentage yield on each investment during the coming year depends on whether the economy has a good or a bad year (see Table 17). It is equally likely that the economy will have a good or a bad year.

a If Rollo is risk-neutral, how should he invest his money?
b For $10,000, Rollo can hire a consulting firm to forecast the state of the economy. The consulting firm’s forecasts have the following properties:
P(good forecast|economy good) .80 P(good forecast|economy bad) .20 Should Rollo hire the consulting firm? What are EVSI and EVPI?

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TABLE 17 Economy Has Good Economy Has Bad Year Year Yield on stocks 22% 10% Yield on bonds 16% 14%