MGMT 670 Homework 2: Due 11:59 PM EST On September 9. Submit Via Brightspace

MGMT 670 Homework 2
Due 11:59 pm EST on September 9. Submit via Brightspace.
1. Susan, the marketing manager of a consumer electronics company, is considering whether to

introduce a new large screen television model into the market. Susan is aware that the success
of the new model depends on the economy in the coming year which in turn depends on the
result of the upcoming presidential election. According to her assessment, the incumbent and
the challenger are equally likely to win the elections. A fixed cost of 3 million dollars has
been incurred prior to making the decision to launch the model. The payoff table (in millions)
for the two alternative actions is set up as follows (the fixed cost has been included in the
calculation):
Presidential Election Outcome

Introduction of the new model Incumbent Challenger
Yes -36 45
No -3 -3
(a) Find the expected payoffs of the two alternatives. Which is better?
(b) Compute the expected value of the perfect information.
(c) Bob, a well known consultant, proposed a project for Susan to consider. Bob argued
that he could provide a prediction of the election result through a special survey method.
Susan just graduated and received an A grade in MGMT 670 two years ago. She still
remembers the correct method of using Bayes’ Theorem. After interviewing Bob, Susan
obtained the following probability estimates:
P(Predicted Winner is Incumbent | Real Winner is Incumbent) = .7
P(Predicted Winner is Challenger | Real Winner is Incumbent) = .3
P(Predicted Winner is Incumbent | Real Winner is Challenger) = .2
P(Predicted Winner is Challenger | Real Winner is Challenger) = .8.
Complete the following decision tree for evaluating the expected payoff with the predic-
tion result (sample information) from Bob. Compute EVSI.
(d) Suppose Bob has been hired and his prediction is that the incumbent will win. Should
Susan introduce the new TV model? Support your answer.
1
2. Over the past 10 years, the expected return for the S&P 500 was 5.04% with a standard
deviation of 19.45%, the expected return over that same period for a core bonds fund was
5.78% with a standard deviation of 2.13%, and the expected return for real estate investment
trusts (REITs) was 13.07% with a standard deviation of 23.17%. The correlation between the
S&P 500 and core bonds is −0.32, the correlation between the S&P 500 and REITs is 0.74,
and the correlation between core bonds and REITs is −0.04. You are considering portfolio
investments.
(a) Construct a portfolio that is 50% invested in an S&P 500 fund and 50% invested in
REITs. In percentage terms, what are the expected return and standard deviation for
such a portfolio?
(b) Construct a portfolio that is 50% invested in a core bonds fund and 50% invested in
such a portfolio?
(c) Construct a portfolio that is 80% invested in a core bonds fund and 20% invested in
such a portfolio?
(d) Which of the portfolios in parts (a), (b), and (c) would you recommend to an aggressive
investor? Which would you recommend to a conservative investor? Why?
3. According to a survey, one out of five investors have exchange-traded funds in their portfolios.
Consider a sample of 20 investors.
(a) Compute the probability that exactly 4 investors have exchange-traded funds in their
portfolios.
(b) Compute the probability that at least 2 of the investors have exchange-traded funds in
their portfolios.
(c) If you found that exactly 12 of the investors have exchange-traded funds in their port-
folios, would you doubt the accuracy of the survey results?
(d) Compute the expected number of investors who have exchange-traded funds in their
portfolios.
4. To qualify for membership in Mensa, the international high-IQ society, an individual must
score in the top 2% of the population on a Full Scale IQ (FSIQ) test. Given that IQ scores
are normally distributed with a mean of 100 and a standard deviation of 16, what IQ score
is required to meet this criterion? Moreover, what is the chance that a randomly selected
person has an IQ score above 140?
5. According to a survey, nearly 40% of adult cell phone owners have downloaded an application
(“apps”) to their cell phone. Anyone who has not downloaded an app clearly does not use
apps. In a random sample of 50 adult cell phone owners, how likely is it to find that more
than 50% have downloaded an app on their phone?

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MGMT 670 Homework 2

Due 11:59 pm EST on September 9. Submit via Brightspace.

1. Susan, the marketing manager of a consumer electronics company, is considering whether to

Presidential Election Outcome

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