Exhibit 14.5 The Following Questions Are Based on the Information Below

question 125

Multiple Choice

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-Decision models are applicable when

• A) there are multiple alternatives
• B) there are multiple states of nature
• C) there is only one alternative
• D) there is only one state of nature

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Definitions:

Profit Margin

A financial performance ratio that shows the percentage of profit a company makes for each dollar of revenue.

Return on Assets

A profitability ratio that indicates how efficiently a company is using its assets to generate profit.

Return on Equity

An indicator of a company's financial performance that shows the amount of profit generated per dollar of shareholders' investment.

Profitability Index

A financial metric that measures the relationship between the present value of future cash flows and the initial investment.