1. OUTLINE
Questions?
Midterm Results
Discuss homework
Amazon
Commodities
460
Monte Hall
Chapter 6
Risk and Return on investment

2. Midterm Results

3. Midterm Results

4. Monte Hall
Suppose you're on a game show, and you're given the choice of three doors: Behind one door is a car; behind the others, goats. You pick a door.

5. Monte Hall
and the host, who knows what's behind the doors, opens a door, which has a goat. He then says to you, "Do you want to pick another door, that is, change your original choice?"

6. Discounted Cash Flow Money earned in the future is worth less today
Present Value = Future Value /( 1 + interest rate/period)^ # of periods
Example1:
I lend someone $1000 for two years at 4% interest, compounded annually. How much do they have to pay me back two years from now?
F = P(1+I)^n = 1000(1+.04)^2 = $
Example2:
A company will make a $5000 profit 3 years from now. How much should they invest now to break even at a 10% Minimum Attractive Rate of Return (MARR)?
P = F/(1+I)^n = 5000/(1+.1)^3 = $

7. Expected Value and Utility
Probability x payoff

8. What is a tree diagram?
Describes all possibilities of a sequence of events and associated probabilities

9. Using simulation instead of a tree diagram