Exam 16: Risk Analysis

To justify an investment that involves an out-of-pocket cost of $100 and a 50/50 chance of payoffs of $0 or $250, the decision maker must have personal certainty equivalent adjustment factor that is:

Standard Normal. A leading company in the freight forwarding business offers Overnight Letter delivery service with a record of on-time delivery for 99% of shipped parcels. The price of this service is $15. Express Mail, offered by a leading competitor for $10, has an on-time delivery record of 95%. A. Calculate the cost incurred due to late delivery that would make shippers indifferent to these deliver service alternatives. B. Which delivery alternative is preferred if a $100 cost would be incurred due to late delivery?

The difficulty of selling corporate assets at favorable prices under typical market conditions is:

Probability Analysis. Tex-Mex, Inc. is a rapidly growing chain of Mexican-food restaurants. The company has a limited amount of capital for expansion, and must carefully weigh available alternatives. Currently, the company is considering opening restaurants in Phoenix and/or Tucson, Arizona. Projections for the two potential outlets are: Each restaurant would involve a capital expenditure of $1.5 million, plus land acquisition costs of $500,000 for Phoenix and $1,050,000 for Tucson. The company uses the 10% yield on riskless U.S. Treasury bills to calculate the risk-free annual opportunity cost of investment capital. A. Calculate the expected value, standard deviation, and coefficient of variation for each outlet's profit contribution. B. Calculate the minimum certainty equivalent adjustment factor for each restaurant's cash flows that would justify investment in each outlet. C. Assuming the management of Tex-Mex is risk averse, and uses the certainty equivalent method in decision making, which is the more attractive outlet? Why?

Expected Return Analysis. Barry Bonds offers free fixed-income investment seminars to local YMCA groups. On average, Bonds expects 10% of seminar participants to purchase customized financial planning services priced at $500 each, and 25% to purchase an investment option priced at $100. A. Calculate Bonds' expected gross return per seminar if attendance averages ten persons.

Game Theory. Jessica's, a local retailer of women's clothing is considering adoption of new Sunday hours between 12:00 PM and 6:00 PM. Jessica's is closed on Sundays. Of course, the consumer response to this extension in hours depends on the competitor response, if any. The following annual profit contributions (payoffs) are expected: A. Which decision alternative would Jessica's choose given a secure strategy criterion? Explain. B. Calculate the opportunity loss (or regret) matrix. C. Which decision alternative would Jessica's choose if the company seeks to minimize opportunity cost? Explain.

When E(R) = $100,000, only a risk-seeking investor would make a certain sum investment in an amount: