Compute the Expected Value of Perfect Information -What Is the Expected Opportunity Loss for the 30-Year Fixed

question 46

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 30-year fixed decision?

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

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Definitions:

Depletion Rate

The rate at which a natural resource is used or consumed, important for accounting and valuation of resource-based companies.

Extractable Ore

Refers to the portion of a mineral or natural resource deposit that can be economically and legally extracted or produced at the time of consideration.

Units-Of-Production Method

An approach to depreciation that allocates an asset's cost based on its use, output, or production, rather than passing time.