A stock market advisory service

PRACTICE 2 - DMUR:
A stock market advisory service offers three investments portfolios for one of its customers. All portfolios have the same investment cost. Portfolio U contains speculative stocks, which aim for capital gain through price appreciation. Portfolio V is made up of stocks of stable companies that pay good dividends overt the long run. Portfolio W comprises stocks with a moderate potential for growth and a moderate yield of dividends.

The customer has enough money to invest in only one of these three portfolios for a period of one year. The net return on investments will depend on whether the economy during the period will be in a stage of inflation, recession, or depression. The net potential gains or losses (in thousands) are calculated as follows:

STATES OF NATURE
⇓ Recession Inflation Depression

ALTERNATIVES Portfolio U $ 25 $ 75 $ 0
Portfolio V $ 47 $ 70 $ – 5
Portfolio W $ 50 $ 80 $ – 15
Fi .2 .5 .3

2. DMUR: Consider now that the probabilities for each demand have been calculated as .2, .5, and .3, respectively. Find the expected value (Xbar), the standard deviation (Sigma), and the Coefficient of Variation (CoV) for each alternative. Which size of equipment would you recommend on the basis of the three?

Referring to the Z-Table, calculate the probability that each alternative will turn out at least a $45K profit? From the Normal Distribution point of view, which alternative is best?

Be sure to show work, indicate the recommended alternative each time, provide a summary table (see below), and support your final statement with a reason.

DMUR: Results
Xbar Sigma CoV Normal Dist. %
A
B
C
Be Sure To Support Your Answers (Give Reasons!)

PRACTICE 3

Consider the following decision matrix presenting net profit/loss estimates regarding an investment project:
DEMAND
LOW MEDIUM HIGH
EQUIPMENT USED Small 300 400 500
Medium 100 600 600
Large – 300 300 900

1. Considering that the probabilities applicable to demand are not known, show the decision recommendations from the points of view of perfect optimism; perfect pessimism; optimism at α = .6; conservatism (equal likelihood); and minimization regrets. Do you see a pattern? If so, which equipment would you choose? Explain.
2. Consider now that the probabilities for demand being low, medium and high have been calculated as .2, .35, and .45, respectively. By using a decision tree, find the expected value, the standard deviation, and the coefficient of variation foe each size of equipment. Which size of equipment would you recommend on the basis of the three coefficients of variation that you calculated?
3. Referring to the Z-Table, calculate the probability that each alternative (each different equipment) will turn out at least a $100 profit? What is the likelihood that each alternative will produce a profit BETWEEN $200 and $300?

Be sure to show work , indicate the recommended alternative each time, provide a summary table (see below) , and support your final statement with a reason .

DMUU: Letter & Value Reason
Perfect Optimism:
Perfect Pessimism
Optimism at α =_:
Equal Likelihood:
Minimizing Regret:

Overall DMUU: ____ (Give Reasons!)

DMUR: Results
Xbar Sigma CoV Normal Dist. %
A
B
C
Be Sure To Support Your Answers (Give Reasons!)