Compute the Expected Value of Perfect Information -What Is the Expected Opportunity Loss for the 1-Year ARM

question 36

Multiple Choice

Compute the expected value of perfect information.
Use the below information to answer the following question(s) . Below is a payoff table with three mortgage options: $$\begin{array} { | l | l | l | l | } \hline & { \text { Outcome } } \\\hline \text { Probability } & { \mathbf { 0 . 6 } } & { \mathbf { 0 . 3 } } & { \mathbf { 0 . 1 } } \\\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\\hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\\hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\\hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\\hline\end{array}$$
-What is the expected opportunity loss for the 1-year ARM?

• A) $ 7,979.60
• B) $ 3,959.40
• C) $ 6,853.50
• D) $ 8,621.40

---

Definitions:

Twin Studies

Research studies that compare the similarity between monozygotic (identical) and dizygotic (fraternal) twins to understand genetic and environmental influences.

Major Depression

A syndrome in mental health where there's a persistent somber mood or lack of interest in activities, markedly impacting daily functionality.

Bipolar Disorder

A mental health condition characterized by extreme mood swings that include emotional highs (mania or hypomania) and lows (depression).

Bipolar Disorder

A psychiatric condition characterized by dramatic shifts in mood, from high (mania or hypomania) to low states (depression).