Using EMV, which decision should the investor take?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks about the decision an investor should make using EMV (expected monetary value) and provides four options to choose from: S, B, U, D.

Option S: This option is identified as the correct one in the provided data. In EMV analysis, the guiding principle is to select the decision that yields the highest expected monetary value across possible outcomes. By choosing S, the investor would maximize the weighted average of possible payoffs, taking into account both probabilities and monetary outcomes. In other words, S aligns with the core EMV rule of maximizing the aggregate expected value.

Option B: This choice is not selected because, under EMV, even if B might offer certain favorable aspects (like lower risk or a high payoff in a favorable state), its overall expected value is not as high as that of S. The EMV calculation would show a smaller weighted average payoff compared to S, so B is not optimal.

Option U: If U were to present a different set of outcomes or probabilities, the EMV for U would need to be computed and compared to S. Since S is the recommended choice, U must have either a lower expected value or a higher variance without a compensating increase in expected payoff. Either way, EMV does not favor U over S.

Option D: Similar reasoning applies to D. Unless D yields a higher EMV than S, which would contradict the given correct option, D should be rejected on the basis that its expected monetary value is not the maximum. If D offered a higher EMV, it would have been the chosen option instead of S.

Summary of reasoning across options: EMV-based decision making focuses on the numerical average payoff when outcomes are weighted by their probabilities. The option with the greatest EMV is chosen. Since S is designated as the correct answer, it implies that S provides the largest EMV among the four options, whereas B, U, and D yield smaller EMV values when their outcomes and probabilities are accounted for. The contrasts hinge on the relative magnitudes of expected payoffs, and the EMV criterion disfavors the alternatives unless they produce a superior expected value, which they do not in this scenario.

COMM_V 190 101-104 2025W1 HW10.COMM190.2025.W1

Using EMV, which decision should the investor take?

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