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FIN 223 Beta And Portfolio Analysis

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FIN 223 Beta And Portfolio Analysis

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FIN 223 Beta And Portfolio Analysis

0 Download2 Pages / 353 Words

Course Code: FIN223
University: University Of Wollongong In Dubai

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: United Arab Emirates

Questions:

You are a marketing manager for Haircare company in Dubai, considering the introduction of a new brand of hair shampoo; you need to develop a marketing plan for the product in which you must decide whether you will have a step by step introduction of the product, or a concentrated introduction of the product. You estimate that if there is a low demand for the product (0.7 probability) your first year’s profit will be $100,000 for a step by step introduction. In contrast, if there is a low demand, you will lose $400,000 if you have chosen a concentrated introduction. If there is a high demand, you estimate that your first year’s profit will be $500,000 for a step by step introduction. The same high demand will lead to a profit $2,000,000 for a concentrated introduction. 1) Construct a payoff table for these two alternative courses of decisions. 2) Determine the optimal decision based on the Maximax Criterion. 3) Determine the optimal decision based on the Maximin Criterion. 4) Determine the optimal decision based on Regret Criterion. 5) Determine the optimal decision based on Maximum Likelihood Criterion. 6) Determine the optimal decision based on Expected Value Criterion. 

Answers:

Answer 1

The payoff table for the two alternative courses of decisions is given as follows:

 

Low Demand

High Demand

Step by Step Introduction

$100,000

$500,000

Concentrated Introduction

– $400,000

$2,000,000

Based on the Maximax Criterion, the optimal decision will be to introduce the new brand of hair shampoo with a concentrated introductionas that can earn the maximum profit according to this criterion.

 

Low Demand

High Demand

Maximum

Step by Step Introduction

$100,000

$500,000

$500,000

Concentrated Introduction

– $400,000

$2,000,000

$2,000,000

Based on the Maximin Criterion, the best of the worst payoffs are to be chosen. Thus, the optimal decision will be to introduce the new brand of hair shampoo with a step by step introductionas that can earn the maximum profit according to this criterion.

 

Low Demand

High Demand

Minimum

Step by Step Introduction

$100,000

$500,000

$100,000

Concentrated Introduction

– $400,000

$2,000,000

– $400,000

Based on the Criterion of Regret, the option with the minimum of the maximum regrets are chosen. Thus, the optimal decision will be to introduce the new brand of hair shampoo with a concentrated introductionas that condition comes with the minimum of the maximum regrets according to this criterion.

 

Low Demand

High Demand

Maximum Regret

Step by Step Introduction

$100,000 – $100,000 = $0

$2,000,000 – $500,000 = $1,500,000

$1,500,000

Concentrated Introduction

$100,000 + $400,000 = $500,000

$2,000,000 – $2,000,000 = $0

$500,000

Based on the maximum likelihood criterion, the option with the minimum profit under the most favourable market condition is chosen. In this case, the most favourable market condition is a low demand market, with a probability of 0.7. Thus, the optimal decision will be to introduce the new brand of hair shampoo with a step by step introductionas that condition comes with the maximum profit according to this criterion.

 

Low Demand

High Demand

Profit / Loss in most probable market condition

Step by Step Introduction

$100,000

$500,000

$100,000

Concentrated Introduction

– $400,000

$2,000,000

– $400,000

Probability

0.7

0.3

 

Based on the expected value criterion, the alternative with the maximum expected profit is chosen. Thus, the optimal decision will be to introduce the new brand of hair shampoo with a concentrated introduction as that condition comes with the maximum expected profit according to this criterion.

 

Low Demand

High Demand

Expected Profit

Step by Step Introduction

$100,000

$500,000

($100,000 * 0.7) + (- $500,000 * 0.3) = $220,000

Concentrated Introduction

– $400,000

$2,000,000

(- $400,000 * 0.7) + (- $2,000,000 * 0.3) = $320,000

Probability

0.7

0.3

 

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