BUS 520 Module 4 SLP (Revisions)

Running Head: MODULE 4 SLP 1

MODULE 4 SLP 2

Trident University International

Anthony D. Bradshaw

Module 4 SLP

BUS 520 Business Analytics and Decision Making

Dr. Margaret Sabe

02 July 2016

Module 4 SLP

Introduction

The process of decision making is quite a difficult task that requires the help of an expert who is of high caliber in the subject matter. The process of decision making thus entails a cognitive process which leads to the selection of a course of action from among many alternatives. Therefore, every decision made must have an outcome which can either be an action or option of choice. Whatever the outcome, the process should not be biased and must utilize all the techniques required for decision making (Borgonovo et aal., 2015). The probability that an event will happen should be given a decrease of confidence and a variance to allow for any unexpected circumstances. Therefore, choices need to be selected carefully among many alternative. In this scenario, an expert decision will consider the level of probabilities and the net present value (NPV) for each option stated. This paper therefore presents a complete analysis of three investments; real estate market, retail hat market and high yield municipal bonds to determine a viable investment using a decision theory.

Analysis of results

The attached decision tree in the excel file shows the nature and probabilities of the various market states. However, it is important that to know that the square nodes in the decision tree represents a decision while the circle nodes represents the state of nature. Moreover, a high probability close to one (1) signifies that an event is likely to occur. For instance, if the expert predicts 45% chance of a favorable market, then the real estate will have a probability of 0.75 (favorable) with 0.25 probability (unfavorable). Thus, the expected return of each portfolio is calculated by the following formula;

Expected return (ER) = P(R) where P is the probability and R is the return of the portfolio which represents the net present value (NPV) in this case (Shu, Zeithammer &Payne, 2016). Moreover, all probabilities in the excel file adds up to 1 for both favorable and unfavorable occurrences. In view of the spread sheet file, the expected return for real estate is 4.05 under 45% for an F/F situation while that of Just hats is 3.26. In this case, real estate project under option A will be the best available alternative. On the other hand, under 30% level of probability for a U/F situation, real estate return 1.675 while just hats returns 3.26. Thus, the latter is chosen since it has the highest possible returns under that particular circumstance. Consequently, the return on real estate option will be selected with 4.05 level of compensation under the F/U situation with a probability of 30%. Finally, with an expert probability of prediction of 15% under the U/U nature of the market, the option to be select will be just hats with 2.42 return. Therefore, given the probabilities in the attached file, there is no significant difference in the value of returns of the portfolio. The expected return of real estate under option A is 4.05 which is below the threshold under the stated nature of market.

Recommendations

In view of the above analysis, the best course of alternative is to selected option A to invest under real estate. Even though it has a high level off risk, the probability of return is higher as compared to just hats under option B under the same conditions. Therefore, based on the experts’ knowledge, it is prudent for any wise investors to select the alternative that produced the highest payoff which is the real estate option.

References

Borgonovo, E., Cappelli, V., Maccheroni, F., Marinacci, M., & Smith, C. L. (2015). Risk analysis and decision theory. Working paper 556, IGIER, Bocconi University.

Shu, S. B., Zeithammer, R., & Payne, J. W. (2016). Consumer Preferences for Annuity Attributes: Beyond Net Present Value. Journal of Marketing Research, 53(2), 240-262.