Learning Goal: I’m working on a excel exercise and need the explanation and answer to help me learn.
Problem Set #2: Decision Tree
This problem set coversmaterial for Week 7, Risk Analysis. Decision Tree Analysis is animportant aspect of Risk Management. It is mentioned, but not treatedextensively in the text.
INSTRUCTIONS:
- Review attached instructor video & slides for reference
- Only problem #1 is required (#2 is optional)
- Please show your work (and not just the answers) to get full credit.
- Will review in week 7 class session.
- Prob. 1. Youmust choose between the two projects below. What is the EMV for each?Looking at your own personal Risk Utility Function, which project wouldyou select and why?Project 1 has a 70% chance of earning $500,000, and a30% chance of losing $100,000. Project 2 has a 20% chance of earning $2million, a 20% chance of earning $1 million, and a 60 percent chance oflosing $500,000.
Prob. 2. You have$1,000,000 worth of equipment at the job site and wish to minimize yourrisk of direct property damage by taking out an insurance policy. Theinsurance company provides you with their statistical data as shownbelow.If the insurance company uses expected monetary value to calculatepremiums, then how much would you expect the premium to be, assumingthe insurance company adds on $300 for handling and profit? (Hint:Remember that translating a probability of 0.02% to a decimal equivalentequals 0.0002.)
Type of Damage Probability (%) Amount of Damage (Loss) ($) Total 0.02 100 Medium 0.08 40 Low 0.10 20 No Damage 99.8 0