Tools for Making Decisions
Question Description
2.
Which of the following statements is true?
A) Decision trees cannot handle problems where the decision maker has multiple objectives
B) Decision trees assume that the decision maker has a neutral attitude to risk
C) Decision trees need to assume that decision makers have a linear value function for money
D) Decision trees often need to make arbitrary assumptions about when the planning period, which is relevant to a decision, ends
3.
Consider the following decision tree:
(see attachment)
The expected payoff at point B is:
A) $37,500
B) $45,000
C) $7,500
D) -$30,000
4.
With reference to the decision tree displayed in Question 3, the expected payoff at point C is:
A) $21,000
B) $10,000
C) $60,000
D) $32,000
5.
With reference to the decision tree displayed in Question 3, assuming that the decision maker wants to maximize his/her expected payoff, the optimum policy is:
A) Buy the new machine
B) Buy the new machine and achieve high efficiency
C) Stay with the old machine and recondition it
D) Stay with the old machine and do not recondition it
6.
Consider the decision tree displayed in Question 3 and assume that the decision maker wants to maximize his/her expected payoff. At point C he/she should be indifferent between reconditioning and not reconditioning the machine when the probability of achieving high efficiency is approximately:
A) 0.50
B) 0.29
C) 0.71
D) Equal to a value that cannot be determined from the information provided
7.
With reference to the decision tree displayed in Question 3, the decision maker has the following utilities: u(-$30,000) = 0, u(-$10,000) = 0.1, u($10,000) = 0.4, u($45,000) = 0.9, u($60,000) = 1.0. To maximize his/her expected utility the decision maker should:
A) Buy the new machine
B) Buy the new machine and achieve high efficiency
C) Stay with the old machine and recondition it
D) Stay with the old machine and do not recondition it
8.
In a decision tree several of the possible events emanating from a chance node are combined into an event labeled “all other events” before probabilities are elicited from the decision maker. According to behavioral decision research, this is likely to:
A) Lead to an overestimate of the probability of “all other events” occurring
B) Lead to an underestimate of the probability of “all other events” occurring
C) Have no effect on the estimate of the probability of “all other events” occurring
D) Reduce the decision maker’s confidence in the decision tree model
11.
Risk analysis using Monte-Carlo simulation is most appropriate when:
A) The payoffs of a decision only depend upon one factor
B) An accurate probability distribution for the payoffs of the decision can be estimated directly by the decision makers
C) The payoffs of a decision depend upon several different factors
D) The decision maker is risk seeking
12.
In a Monte-Carlo risk analysis involving 150,000 simulations, the probability of a new product making a loss in its first year was estimated to be 0.108. Which of these enhancements would be likely to bring about the least improvement on the reliability of this estimate?
A) Increasing the number of simulations to 160,000
B) Including a probability distribution for a missing factor that has an effect on profit
C) Using correlations to model dependence relationships between the factors
D) Increasing the complexity of the underlying model so that it represents the way that profits are generated more accurately
13.
A tornado diagram can show:
A) The probability distribution for the payoffs of a decision
B) Whether one option exhibits stochastic dominance over another
C) The factors that have the greatest influence on the payoffs of the decision
D) The option or options which appear on the efficient frontier
|
The table below shows the probability distributions for the construction costs of two designs for a new bridge across a river.
Which of the following statements is correct? |
17.
A risk averse decision maker has to choose between four investments which have returns with the following means and standard deviations:
|
Investment Mean return ($000) Standard deviation ($000) |
P 100 80 |
Q 125 80 |
R 220 70 |
S 230 70 |
If the assumptions required for the mean-standard deviation approach are satisfied, the efficient frontier consists of:
18.
Which of the following assumptions is not needed in order to apply the net present value (NPV) approach to investment appraisal?
A) The investor’s relative preference for receiving a sum of money now rather than at a given period in the future is the same, irrespective of the size of the sum involved
B) The investor’s relative preference for receiving a sum of money in two adjacent years is the same, whatever those years are
C) It is preferable to receive a sum of money now rather than in the future
D) The future cash flows are known for certain
19.
In the NPV approach to investment appraisal the discount rate is not intended to take into account:
A) Returns that could be earned if the money was invested in an alternative project
B) The decision maker’s relative preference for receiving money now rather than in a year’s time
C) The lifetime of the investment project
D) Interest that could be earned if the money was invested in a bank account instead of the project under consideration
20.
An investment project involves an immediate outlay of $8 million. The net cash flows received at the end of years 1, 2, and 3 will be $3 million, $4 million, and $2 million. A 10% discount rate is applicable so that the present value factors for years 1, 2, and 3 are 0.9091, 0.8264, and 0.7513. The NPV of the investment will be:
A) $1 million
B) $9 million
C) -$0.46 million
D) $7.54 million
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