Compute the Expected Value of Perfect Information -What Is the Expected Opportunity Loss for the 3-Year ARM

question 17

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 3-year ARM?

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

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Definitions:

Yield Rate

Yield rate represents the earnings generated and realized on an investment over a particular period, expressed as a percentage.

Compounded Semi-annually

Pertains to the process of adding interest to the principal sum of a loan or deposit on a twice-yearly basis, allowing the interest to also earn interest at these intervals.

Service Industries

Sectors of the economy that provide services rather than physical goods, such as healthcare, banking, and education.

Growth Rate

The rate at which a company's earnings, revenues, or other key metrics increase over a specified period.