This problem set covers material for Week 7, Risk Analysis. Decision Tree Analysis is an important aspect of Risk Management. It is mentioned, but not treated extensively in the text.
INSTRUCTIONS:
Review attached instructor video & slides for reference
Only problem #1 is required
Show your work to get full credit.
Will review in week 7 class session.
Prob. 1. You must choose between the two projects below. What is the EMV for each? Looking at your own personal Risk Utility Function, which project would you select and why?Project 1 has a 70% chance of earning $500,000, and a 30% chance of losing $100,000. Project 2 has a 20% chance of earning $2 million, a 20% chance of earning $1 million, and a 60 percent chance of losing $500,000.
