Question
Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the
Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 |
1. The probability that the advisor predicts a Bear market and the Bear market is the actual condition P(F2 and S2) is?
2. If the advisor predicts a Bear market the revised probability of a Bear market, P (S2|F2), is?
3. If the advisor predicts a Bear market the EMV of the Stocks alternative, using revised probabilities, is?
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