INSTRUCTIONS: Please complete the questions described in the brief. For the first question, please submit an Excel file with all the decision criteria solved and a text box containing your answer to the questions. For the second question, please submit a solved decision tree with a payout table.

Finance

Setup:

We are looking at several different portfolio options and trying to decide how to pick the best one. We have a few possible combinations, each of which is impacted by future economic conditions differently. Weve summarized the different options with the expected outcomes below. Please provide us with a few options for decision criteria and let us know if any particular setup has any sort of advantage across all the different criteria.

		Economic States
		1	2	3	4	5
Portfolio Options	A	100	20	24	-200	30
	B	32	38	27	35	20
	C	15	49	18	42	27
	D	-20	28	34	63	49
	E	20	38	26	32	23
	F	25	25	25	25	25

Economic States Probabilities
1	2	3	4	5
0.075	0.275	0.2	0.125	0.325

Follow-up Questions:

Were looking at possibly working with an economic consulting team to give us a better idea of the current outlook. They stressed to us that they dont disagree with our probabilities, but rather that there are some indications as to which direction the economy is heading. As we negotiate the cost of their reports, we could use some guidance as to how much we should be willing to pay.

Security

Weve been looking into options for strengthening our security system, but we can seem to reach a consensus as to how to go about it. Could you provide us with a good map for looking at how to wade through all the possibilities and get at the most cost-effective solution? Heres what we can tell you:

The first option is to leave the security system as is. If we do, theres about a 5% chance of somebody managing to break in. Should they manage to do that, theres a roughly 10% chance they could get away with some very valuable equipment. This could cost us as much as $5,000,000. At that point, we could eat the loss or attempt to get the equipment replaced through our insurance company. Some of our more experienced employees have seen that this is not guaranteed to work out since insurance companies usually try to find a way to avoid paying out. We anticipate a 60% chance of a full payout, in which case we break even. Theres also a 35% that they only give us a partial payout, in which we expect to only make back up to $3,000,000. They also might reject the claim outright and pay us nothing.

Some of the team are saying that we need to update our system, but only a simple upgrade. This simple upgrade would cost us $1,000,000 and lower the probably of a break-in to 3%. From there, everything else stays the same.

A smaller constituent of our group are pulling for a more intense system update costing $10,000,000. The benefits of this are that it would decrease the probability of a break-in even further, and our insurance company would be more likely to payout. The probably of a break-in would drop to 1%, the probably that anybody who breaks in could steal our equipment drops to 5%, and the insurance would be 80% likely to give us a full payout and 15% likely to give us a partial payout.

Another group is saying that all we really need to do is pay for better insurance, given that the chance of a break-in is already so small. The would only cost us $500,000. This wouldnt decrease the chances of a break-in, but it does increase the chances of getting a full payout to 75% and a partial payout to 22%.

We would like to know the best course of action and what we should expect the costs to be for each possibility.