1. Solve the decision tree in Figure 4.44. 2. Create risk profiles and cumulative risk profiles...

Question

1. Solve the decision tree in Figure 4.44.   2. Create risk profiles and cumulative risk profiles for all possible strategies in Figure 4.44. Is one strategy stochastically dominant? Explain.

David · Accepted Answer

1. Solve the decision tree in Figure 4.44.
We are given here, D1 D2 A B 
(0.27) 
A2 A1 $8 $0 $15 
(0.5) (0.73) (0.45) (0.55) 
$4$10$0 
U1 U3 U2 
EV (U2) = 0*0.5+15*0.5=$7.5 
O21 
O11 
O22 
EV (U1) = 8*0.27+4*0.73=$5.08 
O12 
EV (U3) =10*0.45+0*0.55=$4.

1. Solve the decision tree in Figure 4.44. 2. Create risk profiles and cumulative risk profiles for all possible strategies in Figure 4.44. Is one strategy stochastically dominant? Explain.

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