(b) A company has three investment options to choose from: namely, bank products (denoted by dı), bonds (da) and stocks

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B A Company Has Three Investment Options To Choose From Namely Bank Products Denoted By Di Bonds Da And Stocks 1 (85.02 KiB) Viewed 33 times

(b) A company has three investment options to choose from: namely, bank products (denoted by dı), bonds (da) and stocks (dz). The return from each option depends on the future economy which could be bright (denoted by sı) or gloomy (S2). Specifically, if d, is chosen: if si occurs, the return will be $3 million; if sy occurs, the return will be $2 million; if da is chosen: if si occurs, the return will be $5 million; if s2 occurs, the return will be $1 million; if d3 is chosen: if si occurs, the return will be $9 million; if s2 occurs, the return will be $-3 million, i.e., a loss of $3 million. There is a probability of 0.8 that the future economy might be bright, and a probability of 0.2 that it might be gloomy. (1) Construct a decision tree for this problem. (ii) Identify the investment option with the best expected return. (25 marks)