Use the Information Below to Answer the Following Questions) The Probability of Rates Rising Is 0

question 42

Multiple Choice

Use the information below to answer the following questions) . The payoff table given below lists four mortgage options: $$\begin{array} { | l | l | c | c | } \hline && { \text { Outcome } } \\\hline \text { Probability } & 0.6 & { 0.3 } & 0.1 \\\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\\hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\\hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\\hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\\hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\\hline\end{array}$$ The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1.
-Which of the following decisions has the largest expected payoff?

• A) 1-year ARM
• B) 3-year ARM
• C) 5-year ARM
• D) 30-year fixed

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Definitions:

Causal Research

A type of market research that seeks to find cause-and-effect relationships between variables.

Machine Learning

A subset of artificial intelligence that involves the development of algorithms that enable computers to learn and improve from experience without being explicitly programmed for specific tasks.

Structured And Unstructured Data

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Predictive Modeling

The process of using statistical techniques and algorithms to forecast outcomes based on historical data.