Answer Happy

Question 2: (30 pts) There are 4 investment alternatives and 3 states of nature: The market can go up, go down or stay unchanged. An example of the payoff matrix is as below. A B с D Probability 25% 40% 35% 1 2 Go down Stay unchanged Go up 3 Alternative 1 125 130 150 4 Alternative 2 45 100 200 5 Alternative 3 -10 90 250 125 100 90 6 Alternative 4 7 a) What is the value of perfect information about the market (an information which tells you, how the market will change (go up, go down or stay unchanged) with 100% accuracy) for the given probabilities and payoffs? b) There is an analyst who knows when the market will go down with 100% accuracy. But when he claims that the market will go up, it really goes up by 90%, and stay unchanged by 10% of the cases. When he claims that the market will stay unchanged, it really happens by 80% and market go up by 10%. What is the value of this imperfect information that predicts the market's direction?