Ray Crofford Is Evaluating Investment Alternatives for the $100,000 Which $\quad$

question 24

Multiple Choice

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Actual Market }$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Market Condition }$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Advisor's}$$\quad$$\text {Condition}$
$\begin{array}{c}\begin{array}{|c|c|c|c|}\hline \text { Investment } & \text { Bull (0.8) } & \text { Bear (0.2) } & \text { EMV } \\\hline \text { Bonds } & 12 & -3 & 9 \\\hline \text { Stocks } & 25 & -30 & 14 \\\hline \end{array}&\begin{array}{|c|c|c|}\hline\text { Prediction } & \text { Bull }\left(S_{1}\right) & \text { Bear }\left(S_{2}\right) \\\hline \text { Bull }\left(F_{1}\right) & 0.9 & 0.3 \\\hline \text { Bear }\left(F_{2}\right) & 0.1 & 0.7\\\hline \end{array}\end{array}$

The probability that the advisor predicts a Bull market, P (F₁) , is ________.

• A)0.78
• B)0.894
• C)0.953
• D)0.923
• E)1.000

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Definitions:

Law of Supply

The economic principle stating that as the price of a good or service increases, the quantity supplied of that good or service will also increase, ceteris paribus.

Decreasing Opportunity Costs

A situation in which sacrificing less of one good to produce another becomes possible, often due to efficiencies or learning.

Marginal Utility

The extra pleasure or benefit gained by a person from consuming one more unit of a product or service.

Breast Milk

The milk produced by human breasts or mammary glands, specifically designed to feed babies and infants, containing essential nutrients for development.