Question 1: Allen Young has always been proud of his personalinvestment strategies and has done very well overthe past several years. He invests primarily in thestock market. Over the past several months, however,Allen has become very concerned about thestock market as a good investment. In some cases itwould have been better for Allen to have his moneyin a bank than in the market. During the next year,Allen must decide whether to invest $10,000 in thestock market or in a certificate of deposit (CD) at aninterest rate of 9%. If the market is good, Allenbelieves that he could get a 14% return on hismoney. With a fair market, he expects to get an 8%return. If the market is bad, he will most likely getno return at all-in other words, the return would be0%. Allen estimates that the probability of a goodmarket is 0.4, the probability of a fair market is 0.4,and the probability of a bad market is 0.2, and hewishes to maximize his long-run average return.
- Develop a decision table for this problem.
- What is the best decision?
Question 2: In Problem you helped Allen Young determinethe best investment strategy. Now, Young is thinkingabout paying for a stock market newsletter. A friendof Young said that these types of letters could predictvery accurately whether the market would begood, fair, or poor. Then, based on these predictions, Allen could make better investment decisions.
- What is the most that Allen would be willing topay for a newsletter?
- Young now believes that a good market wills givea return of only 11% instead of 14%. Will this informationchange the amount that Allen would bewilling to pay for the newsletter? If your answeris yes, determine the most that Allen would bewilling to pay, given this new information.
Question 3: Data collected on the yearly demand for 50-poundbags of fertilizer at Wallace Garden Supply areshown in the following table. Develop a 3-year movingaverage to forecast sales. Then estimate demandagain with a weighted moving average in whichsales in the most recent year are given a weight of 2and sales in the other 2 years are each given a weightof 1. Which method do you think is best?
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DEMAND FOR FERTILIZER
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YEAR (1,000S OF BAGS)
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1
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4
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2
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6
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3
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4
|
|
4
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5
|
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5
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10
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6
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8
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7
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7
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8
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9
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9
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12
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10
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14
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11
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15
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