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In problem 3-21 you helped Allen Young determine the best 
investment strategy.  Now, Young is thinking about paying for 
a stock market newsletter.  A friend of Young said that these 
types of letter could predict very accurately whether the 
market would be good, fair, or poor.  Then, based on these 
predictions, Allen could make better investment decisions.
 
 
A. What is the most that Allen would be willing to pay for a
newsletter? 
2
Alternative Market
Condition/
Good
Fair Poor EMV
Stock Market 1,400 800 0 880
Bank Deposit 900 900 900 900
Probabilities 
of Market 
Conditions
0.4 0.4 0.2  
Perfect 
Information
1400 900 900 1100
         
3
EMV SOLUTION :
STOCK MARKET
$1,400 X 0.4 + 800 X 0.4 + 0 X 0.2 = $880
BANK DEPOSIT
$900 X 0.4 + 900 X 0.4 + 900 X 0.2 = $900
MAXIMUM EMV IS $900
EVI SOLUTION : expected value with perfect information - max(EMV)
= $1400 X 0.4 + 900 X 0.4 + 900 X 0.2
= $1100 - 900
= $200
4
B. Young now believes that a good market will give a return of only
11% instead of 14%. Will this information change the amount that
Allen would be willing to pay for the newsletter? If you answer is yes,
determine the most that Allen would be willing to pay, given this new
information.
5
Alternative Market
Condition/
Good
Fair Poor EMV
Stock Market 1,100 800 0 760
Bank Deposit 900 900 900 900
Probabilities
of Market
Conditions
0.4 0.4 0.2
Perfect
Information
1100 900 900 980
Jen Sites 3-22 6
EMV SOLUTION :
STOCK MARKET
$1,100 X 0.4 + 800 X 0.4 + 0 X 0.2 = $760
BANK DEPOSIT
$900 X 0.4 + 900 X 0.4 + 900 X 0.2 = $900
EMV IS $900
EVI SOLUTION : expected value with perfect information - max(EMV)
= $1100 X 0.4 + 900 X 0.4 + 900 X 0.2
= $980 - 900
= $80
The answer is yes since EV/PI - max(EMV) is only $80.
Jen Sites 3-22 6
EMV SOLUTION :
STOCK MARKET
$1,100 X 0.4 + 800 X 0.4 + 0 X 0.2 = $760
BANK DEPOSIT
$900 X 0.4 + 900 X 0.4 + 900 X 0.2 = $900
EMV IS $900
EVI SOLUTION : expected value with perfect information - max(EMV)
= $1100 X 0.4 + 900 X 0.4 + 900 X 0.2
= $980 - 900
= $80
The answer is yes since EV/PI - max(EMV) is only $80.

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