Chapter 19 More on Variation and Decision Making Under Risk

Solutions to Problems 19.1 (a) Continuous (assumed) and uncertain no chance statements made. (b) Discrete and risk plot units vs. chance as a continuous straight line between 50 and 55 units. (c) variables! "irst is discrete and certain at #$00% second is continuous "or #$00& but uncertain (at this point). 'ore data needed to assign an( probabilities. (d) Discrete variable with risk% rain at 0)& snow at *0)& other at 50). +eeded or assumed in"ormation to be able to calculate an e,pected value! 1. -reat output as discrete or continuous variable . . ." discrete& center points on cells& e.g.& /00& 1500& and 00 units per week. *. 0robabilit( estimates "or 1 1000 and 2or 3 000 units per week. (a) + is discrete since onl( speci"ic values are mentioned% i is continuous "rom 0 to 1 . (b) -he 0(+)& 4(+)& 0(i) and 4(i) are calculated below. + 0(+) 4(+) i 0(i) 4(i) (c) 0 .1 .1 07 . . 1 .55 .5/ 7$ .10 .* . 5 .9$ $75 .1 .$$ * .0* .96 57/ .$ ./5 $ .0* 1.00 /710 .0/ .9$ 1071 .05 1.00

19.

19.*

0(+ 8 1 or ) 8 0(+ 8 1) 9 0(+ 8 ) 8 0.55 9 0. 5 8 0./ or 4(+ ) 4(+ 0) 8 0.9$ 0.1 8 0./ 0(+ *) 8 0(+ 8 *) 9 0(+ $) 8 0.05

(d)
Chapter 19

0(6) i 11)) 8 0(5.01 i 1 )

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8 0.$ 9 0.0/ 9 0.05 8 0.55 or 4(i 1 )) 4(i 5)) 8 1.00 0.$$ 8 0.55 19.$ (a) # 4(#) 0 .91 .955 5 .9/ 10 .99* 100 1.000

-he variable # is discrete& so plot # versus 4(#). (b) <(#) 8 #0(#) 8 0.91(0) 9 ... 9 0.006(100) 8 0 9 0.09 9 0.1 5 9 0.1* 9 0.6 8 #1.0$5 .000 1.0$5 8 0.955 ?ong7term income is 95.5 cents per ticket 0(+) 8 (0.5)+ + 0(+) 4(+) 1 0.5 0.5 + 8 1& &*&... 0. 5 0.65 * 0.1 5 0./65 $ 0.05 5 0.9*65 5 0.0*1 5 0.95/65 etc.

(c)

19.5

(a)

0lot 0(+) and 4(+)% + is discrete. 0(?) is triangular like the distribution in 4igure 1975 with the mode at 5. "(mode) 8 "(') 8 57 8 *

4(mode) 8 4(') 8 57 8 1 57 (b) 19.5 0(+ 8 1& or *) 8 4(+ *) 8 0./65

4irst cost& 0 00 8 "irst cost to purchase 0? 8 "irst cost to lease

Chapter 19
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Cse the uni"orm distribution relations in <Duation E19.*F and plot. "(00) 8 12( 5&000 0&000) 8 0.000 "(0?) 8 12( 0001/00) 8 0.005 Galvage value& G G0 is triangular with mode at # 500. -he "(G0) is s(mmetric around # 500. "(') 8 "( 500) 8 2(1000) 8 0.00 is the probabilit( at # 500. -here is no G? distribution =;C "(=;C0) 8 12(90005000) 8 0.000 5 "(=;C?) is triangular with! "(6000) 8 2(90005000) 8 0.0005 "(=;C)
0.0005

"(=;C?) "(=;C0)
#5000 6000 50005000 9000

0.000 5

?i"e& ? "(?0) is triangular with mode at 5. "(5) 8 2(/7$) 8 0.5 -he value ?? is certain at
"(?) Chapter 19 *

(ears.

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1.0

"(??) "(?0)

0.5

?i"e

19.6

(a) Determine several values o" D' and D> and plot. D' or D> "(D') "(D>)

0.0 *.00 0.0 0. 1.9 0.$ 0.$ 1.0/ 0./ 0.5 0.$/ 1. 0./ 0.1 1.5 1.0 0.00 .0 "(D') is a decreasing power curve and "(D>) is linear.
"(D) *.0 .0 1.0 "(D') "(D>)

.$

.5

./

1.0 D'

or D>

50

/0 Debt& )

(b) 0robabilit( is larger that ' (mature) companies have a lower debt percentage and that > ((oung) companies have a higher debt percentage. 19./ (a) (b)
Chapter 19

Hi 4(Hi)

1 0.

0.$

* 0.5

5 0.6

9 0.9

10 1.0

0(5 H 10) 8 4(10) 4(*) 8 1.0 0.5 8 0.$

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or 0(H 8 5& 9 or 10) 8 0.1 9 0. 9 0.1 8 0.$ 0(H 8 $& 5 or 5) 8 4(5) 4(*) 8 0.6 0.5 8 0.1 (c) 0(H 8 6 or /) 8 4(/) 4(5) 8 0.6 0.6 8 0.0 +o sample values in the 50 have H 8 6 or /. = larger sample is needed to observe all values o" H. 19.9 0lot the 4(Hi) "rom 0roblem 19./ (a)& assign the :+ values& use -able 19. to obtain 5 sample H values% calculate the sample 0(Hi) values and compare them to the stated probabilities in 19./. (Instructor note: Point out to students that it is not correct to develop the sample F(X i) from another sample where some discrete variable values are omitted). 19.10 (a) H 4(H) 0 0 . .0$ .$ .15 .5 .*5 ./ .5$ 1.0 1.00

-ake H and p values "rom the graph. Gome samples are! :+ 1/ 59 *1 9 H .$ .65 .56 .5 p 6.10) /./0 6./5 6.50

(b) Cse the sample mean "or the average p value. ;ur sample o" *0 had p 8 5.**65)% (ours will var( depending on the :+s "rom -able 19. . 19.11 Cse the steps in Gection 19.*. =s an illustration& assume the probabilities that are assigned b( a student are! 0.*0 0.$0 0. 0 0.10 0.00 0.00 A8= A8I A8C A8D A84 A8.
5

0(A 8 g) 8

Chapter 19

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Gteps 1 and ! -he 4(A) and :+ assignment are! :+s 0.*0 A8= 007 9 0.60 A8I *0759 4(A 8 g) 8 0.90 A8C 607/9 1.00 A8D 90799 1.00 A84 77 1.00 A8. 77 Gteps * and $! Develop a scheme "or selecting the :+s "rom -able 197 . =ssume (ou want 5 values. 4or e,ample& i" :+1 8 *9& the value o" A is I. :epeat "or sample o" 5 grades. Gtep 5! Count the number o" grades = through D& calculate the probabilit( o" each as count2 5& and plot the probabilit( distribution "or grades = through .. Compare these probabilities with 0(A 8 g) above. 19.1 (a) Jhen :=+D( ) was used "or 100 values in column = o" an <,cel spreadsheet& the "unction =K<:=A<(=1!=100) resulted in 0.5065055/% ver( close to 0.5. :=+DI<-J<<+(0&1) generates onl( integer values o" 0 or 1. 4or one sample o" 100& the average was 0.$/% in another it was e,actl( 0.50. (b) 4or the :=+D results& count the number o" values in each cell to determine how close it is to 10.

19.1* (a) Cse <Duations E19.9F and E19.1 F or the spreadsheet "unctions =K<:=A< and G-D<K. Cell& Hi 500 /00 1000 1 00 1$00 1500 1/00
Chapter 19

"i 5 10 9 15 / 15 6

Hi *50&000 5$0&000 1&000&000 1&$$0&000 1&950&000 &550&000 *& $0&000

"iHi *&500 /&000 9&000 1/&000 *9& 00 $&000 1 &500 &150&000 5&$00&000 9&000&000 1&500&000 5$&//0&000 */&$00&000 &5/0&000

"iHi

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000

10 100

$&000&000

0&000 1*$&$00

$0&000&000 195&1 0&000

=K<:=A<! Hbar 8 1*$&$002100 8 1*$$.00 G-D<K! s 8 195&1 0&000 100 (1*$$) 99 99 8 (1$5&* 6. 6) 8 */ .5*
2 2

(b) Hbar L s is 1*$$.00 L (*/ .5*) 8 56/.9$ and 109.05 =ll values are in the s range. (c) 0lot H versus ". .ndicate Hbar and the range Hbar L s on it. 19.1$ (a) Convert 0(H) data to "reDuenc( values to determine s. H 1 * 5 9 10 0(H) . . . .1 . .1 H0(H) . .$ .5 .5 1./ 1.0 $.5 " 10 10 10 5 10 5 H 1 $ 9 *5 /1 100 "H 10 $0 90 1/0 /10 500 15*0

Gample average! Hbar 8 $.5 Gample variance! s 8 15*0 50 ($.5) 8 11.56 $9 $9 (b) s 8 *.$ Hbar L 1s is $.5 L *.$ 8 1.1/ and /.0 5 values& or 50)& are in this range. Hbar L s is $.5 L 5./$ 8 . $ and 11.$$ =ll 50 values& or 100)& are in this range. 19.15 (a) Cse <Duations E19.15F and E19.15F. Gubstitute > "or D>.
Chapter 19 6

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"(>) 8 >
1

<(>) 8 (>) >d(

>*

* 0 8 2* 0 8 2*
1

Kar(>) 8 (> ) >d( E<(>)F

8 $ Kar(>) 8

>$
0

( 2*)

0 $M $ 9

8 121/ 8 0.05555 N 8 (0.05555) 0.5 8 0. *5 (b) <(>) L N is 0.556 L 0.$6 8 0.195 and 1.1*9 -ake the integral "rom 0.195 to 1.0 onl( since the variableOs upper limit is 1.0.

0(0.195 > 1.0) 8

>d(
1

8>
0.195

8 1 0.0*/ 8 0.95 19.15 (a) Cse <Duations E19.15F and E19.15F. Gubstitute ' "or D '.
1

(95. ))

<(') 8 (') * (1 ') dm

8 * (' ' 9 '*)dm

8 * ' '* 9 '$ * $

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8 *
1

9 * 8 5 / 9 * 8 1 8 0. 5 $ $ $

Kar(') 8 (' ) * (1 ') dm E<(')F

8 * (' '* 9 '$)dm (12$)

8 * '* '$ 9 '5 * 5

1215
0

8 1 *2 9 *25 1215 8 (/0 1 0 9 $/ 5)2/0 8 *2/0 8 0.0*65 N 8 (0.0*65)0.5 8 0.19*5 (b) <(') L N is 0. 5 L (0.19*5) 8 0.1*6 and 0.5*6 Cse the relation de"ined in 0roblem 19.15 to take the integral "rom 0 to 0.5*6 .

0.5*6

0(0 ' 0.5*6 ) 8

*(1 ') dm
0.5*6

8*
0

(1 ' 9 ' )dm

8 * E ' ' 9 12* '*F0.5*6 8 * E 0.5*6 (0.5*6 ) 9 12* (0.5*6 )*F 8 0.95 19.16 Cse <D. E19./F where 0(+) 8 (0.5) + <(+) 8 1(.5) 9 (. 5) 9 *(.1 5) 9 $(0.5 5) 9 5(.0*1 5) 9 5(.0155 5) 9 6(.006/1 5) 9 /(.00*905) 9 9(.00195*) 9 10(.0009655) 9 .. 8 1.999 <(+) can be calculated "or as man( + values as (ou wish. -he limit to the series +(0.5) +
Chapter 19 9
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(95. ))

is .0& the correct answer. 19.1/ <(>) 8 *(12*) 9 6(12$) 9 10(12*) 9 1 (121 ) 8 1 9 1.65 9 *.*** 9 1 8 6.0/* Kar (>) 8 > 0(>) 7 E<(>)F 8 * (12*) 9 6 (12$) 9 10 (12*) 9 1 (121 ) 7 (6.0/*) 8 50.5/* 7 50.159 8 10.$1$ N 8 *. 6 6 8 *./55 and 10.*10

<(>) L 1N is 6.0/* L *.

19.19 Csing a spreadsheet& the steps in Gec. 19.5 are applied. 1. C4=- given "or (ears 0 through 5. . i varies between 5) and 10). C4=- "or (ears 6710 varies between #1500 and # $00. *. Cni"orm "or both i and C4=- values. 19.19 (cont) $. Get up a spreadsheet. -he e,ample below has the "ollowing relations! Col =! 8:=+D ( )P 100 to generate random numbers "rom 07100. Col I& cell I$! 8.+-((.0$P=$95) P100)210000 converts the :+ to i "rom 0.05 to 0.10. -he ) designation changes it to an interest rate between 5) and 10). Col C! 8 :=+D( )P 100 Col D& cell D$! 8.+- (/PC$91500) to convert to a C4=- between #1500 and # $00. -en samples o" i and C4=- "or (ears 6710 are shown below in columns I and D o" the spreadsheet.

Chapter 19

10

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8.+-((0.0$P=1*95)P100)21000 8+0K(#I#$&45!41$)94$

5. Columns 4 and A give two o" the C4=- seDuences& "or e,ample onl(& using rows $ and 5 random number generations. -he entr( "or cells 411 through 41* is 8D$ and cell 41$ is 8D$9 /00& where G 8 # /00. -he 0J values are obtained using the spreadsheet +0K "unction. -he value 0J 8 #7/55 results "rom the i value in I$ (i 8 9.//)) and 0J 8 #*5/0 results "rom appl(ing the '=:: in I5 (i 8 5.0 )). 5. 0lot the 0J values "or as large a sample as desired. ;r& "ollowing the logic o" 4igure 1971*& a spreadsheet relation can count the 9 and 0J values& with Hbar and s calculated "or the sample. 6. Conclusion! 4or certaint(& accept the plan since 0J 8 # 955 e,ceeds Qero at an '=:: o" 6) per (ear. 4or risk& the result depends on the preponderance o" positive 0J values "rom the simulation& and the distribution o" 0J obtained in step 5. 19. 0 Cse the spreadsheet :andom +umber Aenerator (:+A) on the tools toolbar to generate C4=- values in column D "rom a normal distribution with 8 # 0$0 and N 8 #500. -he :+A screen image is shown below. (-his tool ma( not be available on all spreadsheets.)

Chapter 19

11

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19. 0 (cont)

Chapter 19

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-he spreadsheet above is the same as that in 0roblem 19.19& e,cept that C4=- values in column D "or (ears 6 through 10 are generated using the :+A "or the normal distribution described above. -he decision to accept the plan uses the same logic as that described in 0roblem 19.19. Extended Exercise Solution -his simulation is le"t to the student and the instructor. -he same 67step procedure "rom Gection 19.5 applied in 0roblems 19.19 and 19. 0 is used to set up the :+A "or the cash "low values =;C and G& and the alternative li"e n "or each alternative. -he distributions given in the statement o" the e,ercise are de"ined using the :+A. 4or each o" the 507sample cash "low series& calculate the =J value "or each alternative. -o obtain a "inal answer o" which alternative is the best to accept& it is recommended that the number o" positive and negative =J values be counted as the( are generated. -hen the alternative with the most positive =J values indicates which one to accept. ;" course& due to the :+A generation o" =;C& G and n values& this decision ma( var( "rom one simulation run to the ne,t.

Chapter 19

1*

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