Question: The investor plans to invest in only one of three alternatives: a high-risk stock, a low-risk stock, or a savings account that pays a sure $600.

To invest in either stock, the investor must pay a brokerage fee of $200. If the market goes up, the value of the high-risk stock will increase by $1,800, and the value of the low-risk stock will increase by $1,200. If the market stays at the same level, the value will increase by $200 for the high-risk stock, and the value will increase by $300 for the low-risk stock. If the market goes down, the value of the high-risk stock will decrease by $900, and the value of the low risk stock will increase by $200. All of these stock payoffs must be adjusted to cover the $200 brokerage fee.

There is a 0.5 probability that the market will go up, a 0.3 probability that it will stay at the same level, and a 0.2 probability that it will go down.

Task:

A. Calculate the expected value of each of the three investment alternatives.

a. Explain how you reached each of these values.

B. Calculate the expected value of perfect information.

a. Explain how you reached this value.