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An investor is considering 2 investments, A, B, which can be purchased now for $10. There is a 40%chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly. If A grows rapidly, the investor can cash it in for $80 or trade it for investment C, which has a 25% chance of growing to $100 and a 75% chance of reaching $80. If A grows slowly, it is sold for $50. There is a 70%chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly. If B grows rapidly, the investor can cash it in for $100 or trade it for investment D, which has a 20% chance of growing to $95 and an 80% chance of reaching $80. If B grows slowly, it is sold for $45. A decision tree for the problem can be constructed as below.[Fill in the blank] Using backward induction and the expected monetary value (EMV) approach, what is the EMV at decision nodes 1 and 2 (indicated in red in the given diagram). (2 marks)[Fill in the blank] Evaluate the complete decision tree using the Expected Monetary Value (EMV) criteria and advice on the course of action. What is the EMV at decision node 3 as indicated in red in the diagram? (3 marks)[Fill in the blank]

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The problem asks us to use backward induction and EMV to fill in three values along the decision tree. First, focus on the A branch when A grows rapidly. At that node, the investor can either cash in for 80 or trade A for investment C, which has a 25% chance of reaching 100 and a 75% chance of reaching 80. The EMV of the trade option is 0.25×100 + 0.75×80 = 25 + 60 = 85, which is greater than the sure ......Login to view full explanation

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