The Head of Operations for a Movie Studio Wants to Determine

question 19

Multiple Choice

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.She feels that script #1 has a 70% chance of earning $100 million over the long run,but a 30% chance of losing $20 million.If this movie is successful,then a sequel could also be produced,with an 80% chance of earning $50 million,but a 20% chance of losing $10 million.On the other hand,she feels that script #2 has a 60 % chance of earning $120 million,but a 40% chance of losing $30 million.If successful,its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million.As with the first script,if the original movie is a "flop",then no sequel would be produced.
-What is the expected payoff from selecting script #1?

• A)$150 million
• B)$90 6 million
• C)$84 million
• D)$72 million
• E)$60 million

---

Definitions:

Normally Distributed

A statistical term that describes a bell-shaped frequency distribution that is symmetric about the mean, used in various financial models to assume the distribution of returns or asset prices.

Risk-Adjusted Returns

Performance measurement that evaluates the return gained from an investment relative to the risk taken, often calculated using measures such as the Sharpe ratio.

Small Firms

Companies with a relatively small market capitalization.

Large Firms

Corporations or companies that have a significant market capitalization, extensive operations, and a widespread influence in their industries.