1. A is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes,

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1 1. A is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. A) Decision tree B) Graphs C) Trees D) Neural Networks (Ans.: A) Explanation: A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm.

2 2. Which of the following is a schematic model of alternatives available to the decision maker along with possible consequences and alternatives? A) Analytic Hierarchy Process B) Decision making model C) Preference Matrix D) None of the above (Ans.: D) Explanation: A Decision Tree is a schematic model of alternatives available to the decision maker, along with their possible consequences

3 3. Development of a decision tree requires the drawing of a series of nodes and branches. Which statement depicts one mistake check conceivable at a possibility node? A) No error checks are possible B) Probabilities for all branches leaving a chance node must sum to 1.0 C) The expected payoff must equal zero D) Review the data and problem statement three times (Ans.: B) Explanation: The probabilities of all branches leaving the chance nodes must sum to 1.0.

4 4. What decision-making condition must exist in order for the decision tree to be a valuable tool? A) Risk B) Certainty C) Uncertainty D) All of the above (Ans.: A) Explanation: At heart the decision tree technique for making decisions in the presence of uncertainty is really quite simple, and can be applied to many different uncertain situations. While making many decisions is difficult, the particular difficulty of making these decisions is that the results of choosing the alternatives available may be variable, ambiguous, unknown or unknowable. While it may be easy to make a decision for which the results are known, we need a rule to make decisions in an uncertain world. That rule is based on probability, the language most useful for describing and analyzing the future. If the future were certain we would probably decide to take the path that promises the highest value or lowest cost. With uncertainty, we will generally take the path which has the highest expected monetary value or lowest expected cost. These concepts combine the probability that an event will occur with the impact if it does; in other words, expected monetary value and expected cost follow the definition of project risk. Many decisions are like this in risky projects, and we often need to make a decision even if we do not know for sure how it will turn out. These can be very important decisions for the project, and making them correctly increases the possibility of project success.

5 5. How the decision tree reaches its decision? A) Single test B) Two test C) Sequence of test D) No test (Ans.: C) Explanation: A decision tree takes as input an object or situation described by a set of attributes and returns a decision the predicted out value for the input. A decision tree reaches its decision by performing a sequence of tests. Each internal node in the tree corresponds to a test of the value of one of the properties, and the branches from the node are labelled with the possible values of the test. Each leaf node in the tree specifies the value to be returned if that leaf is reached.

6 6. The objective of using decision trees is to A) Expand a Data Flow Diagram so that a user can understand it B) To specify sequence of conditions to be tested and actions to be taken C) Describe a computational procedure that can be easily understood by a person D) Use it as a tool in decision support system (Ans.: B) Explanation: Conducting analysis of decision making under uncertainty using decision trees serves several purposes: First, a decision tree is a visual representation of a decision situation. Second, the branches of a tree explicitly show all those factors within the analysis that are considered relevant to the decision. Third, and more subtly, a decision tree generally captures the idea that if different decisions were to be taken then the structural nature of a situation may have changed dramatically. This is in contrast to an Excel model with sensitivity analysis in which a change of parameters in the model does not represent any structural change to the situation. Capturing the logic and conditionality that is present in a tree would be complex to do in such modelling environments. Fourth, and arguably the most powerful, a decision tree allows for forward and backward calculation paths to happen and hence the choice of the correct decision to take is made automatically.

7 7. The decision tree equivalent of the following structured English is if C2 then if C1 then A3 else A2 endif else A1, A3 endif A) B) C)

8 D) (Ans: C) Explanation: Self Explainable

9 8. The likelihood of group A winning any game is 1/3. Group A plays group B in a competition. In the event that either group wins two games consecutively, that group is proclaimed the victor. At most three games are played in the competition and, if no group has won the competition toward the finish of three games, the competition is proclaimed a draw. What is the expected number of games in the tournament? A) 3 B) 19/9 C) 22/9 D) 25/9 (Ans.: C)

10 9. Which of the following is a valid production rule for the decision tree below? Business Appointment? Temp above 70? No Yes Decision = wear slacks No Decision = wear jeans Yes Decision = wear shorts A. IF Business Appointment= No & Temp above 70 = No THEN Decision = wear jeans B. IF Business Appointment = No & Temp above 70 = No THEN Decision = wear slacks C. IF Business Appointment = Yes & Temp above 70 = Yes THEN Decision = wear shorts D. IF Temp above 70 = No THEN Decision = wear shorts (Ans.: A)

11 10. In a certain college, 10 percent of the students are science majors. 10 percent are engineering majors. 80 percent are humanities majors. Of the science majors, 20 percent have read Newsweek. Of the engineering majors, 10 percent have read Newsweek. Of the humanities majors, 20 percent have read Newsweek. Given that a student selected at random has read Newsweek, what is the probability that that student is engineering major? A) 1/19 B) 2/19 C) 5/19 D) 9/19 (Ans.: A)

12 11. The probability of team A winning any game is 1/3. Team A plays team B in a tournament. If either team wins two games in a row, that team is declared the winner. At most four games are played and, if no team has won the tournament at the end of four games, a draw is declared. Given that the tournament lasts more than two games, what is the probability that A is the winner? A) 1/9 B) 2/9 C) 4/9 D) 5/9 (Ans.: B)

13 12. Ten percent of the students are science majors (S), 20 percent are engineering majors (E), and 70 percent are humanities majors (H). Of S,10 percent have read 2 or more articles in Newsweek, 20 percent 1 article, 70 percent 0 articles. For E, the corresponding percents are 5, 15, 80. For H they are 20, 30, 50. Given that a student has read 0 articles in Newsweek, what is the probability that the student is S or E (i.e., not H)? A) 21/58 B) 23/58 C) 12/29 D) 13/29 (Ans.: B)

14 13. Which of the accompanying techniques for selecting a strategy is predictable with risk averting behavior? A) On the off chance that two methodologies have the same expected benefit, select the one with the smaller standard deviation. B) On the off chance that two methodologies have a similar standard deviation, select the one with the smaller expected benefit. C) Select the methodology with the larger coefficient of variation. D) All of the above are correct. (Ans.: A) Explanation: Risk averse is a description of an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk or smaller standard deviation.

15 14. If a person's utility doubles when their income doubles, then that person is risk A) Averse. B) Neutral. C) Seeking. D) There is not enough information given in the question to determine an answer. (Ans.: B) Explanation: Risk neutral is a term used to describe the mental framework of a person when deciding where to allocate money. Given two investment opportunities, for example, a risk-neutral investor only looks at the potential gains of each investment, and ignores the potential downside risk. A risk-neutral investor, therefore, is only concerned about the expected return of his investment. A classic experiment to define a person's risk-taking appetites involves an investor faced with a choice between receiving either $100 with 100% certainty or $200 with 50% certainty. The risk-neutral investor has no preference either way, since the expected value of $100 is the same for both outcomes. In contrast, the risk-averse investor generally settles for the "sure thing" or 100% certain $100, while the risk-seeking investor opts for the 50% chance of getting $200.

16 15. Strategy A has an expected value of 10 and a standard deviation of 3. Strategy B has an expected value of 10 and a standard deviation of 5. Strategy C has an expected value of 15 and a standard deviation of 10. Which one of the following statements is true? A) A risk averse decision maker will always prefer A to B, but may prefer C to A. B) A risk neutral decision maker will always prefer C to A or B. C) A risk seeking decision maker will always prefer C to A or B. D) All of the above are correct. (Ans.: D) Explanation: Risk Aversion: Risk aversion is the behavior of humans (especially consumers and investors), when exposed to uncertainty, to attempt to reduce that uncertainty. It is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with more certain, but possibly lower, expected payoff. For example, a risk-averse investor might choose to put his or her money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value Risk Neutral: Risk neutral is a mindset where an investor is indifferent to risk when making an investment decision. The risk-neutral investor places himself in the middle of the risk spectrum, represented by risk-seeking investors at one end and risk-averse investors at the other. Risk-neutral measures have extensive application in the pricing of derivatives. Risk Seeking: Risk seeking is the search for greater volatility and uncertainty in investments in exchange for anticipated higher returns. Risk seekers might pursue investments such as small-cap stocks and international stocks, preferring growth investments over value investments. That being said, risk-seeking investors should conduct even greater due diligence when considering a riskier investment, due to the increased implied risk of such investments.

17 16. If a decision maker is risk averse, then the best strategy to select is the one that yields the A) Highest expected payoff. B) Lowest coefficient of variation. C) Highest expected utility. D) Lowest standard deviation. (Ans.: C) Explanation: If someone prefers to receive $B rather than playing a lottery in which expected value is $B then we say that the individual is risk averse

18 17. Circumstances that influence the profitability of a decision are referred to as A) Strategies. B) A payoff matrix. C) States of nature. D) The marginal utility of money. (Ans.: C) Explanation: Events represent possible future situations that will be the primary determinants of the eventual consequence of the decision. The situations must be mutually exclusive (no two or more events can occur simultaneously) and collectively exhaustive (the events must cover all the possibilities). An outcome over which the decision maker has little or no control e.g., lottery, cointoss, whether it will rain today.

19 18. The marginal utility of money diminishes for a decision maker who is: A) A risk seeker. B) Risk neutral. C) A risk averter. D) In a situation of uncertainty. (Ans.: C) Explanation: A risk averter displays a diminishing marginal utility of money. A risk indifferent individual has a constant marginal utility of money. A risk seeker s marginal utility of money increases.

20 19. A strategy that yields an expected monetary payoff of zero is called a A) Risk-neutral strategy. B) Fair game. C) Zero-sum game. D) Certainty equivalent. (Ans.: B) Explanation: The average outcome = a weighted average of the payoffs. A game is defined to be a situation of uncertain outcome with monetary payoffs. Betting the entire company fortune on a new product is a game. A fair game has Expected payoff = 0. I bet $1 on a (fair) coin toss. Heads, I get my $1 back + $1. Tails, I lose the $1. Expected value = i=payoffs P i $ i E[payoff] = (+$1)(1/2) + (-$1)(1/2) = 0. This is a fair game.

21 20. A risk-return trade-off function A) Shows the minimum expected return required to compensate an investor for accepting various levels of risk. B) Slopes upward for a risk averse decision maker. C) Is horizontal for a risk neutral decision maker. D) All of the above are correct. (Ans.: D) Explanation: The risk-return trade-off is the principle that potential return rises with an increase in risk. Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns. According to the risk-return trade-off, invested money can render higher profits only if the investor is willing to accept the possibility of losses.

22 21. If the market interest rate is 10% and a decision maker's risk adjusted discount rate is 12%, then the decision maker A) Is risk averse. B) Has a certainty-equivalent coefficient that is greater than one. C) Is risk neutral. D) None of the above is correct. (Ans.: A) Explanation: Risk-averse investors will assign lower values to assets that have more risk associated with them than to otherwise similar assets that are less risky.

23 22. Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This proves that Fred A) Is risk averse. B) Has a certainty-equivalent coefficient that is equal to one. C) Is risk neutral. D) None of the above is correct. (Ans.: D) Explanation: Fred is risk-seeker as a risk-neutral person would pay the expected value of the lottery i.e. zero. A risk averse would not buy the lottery where as a risk seeker would purchase the lottery.

24 23. The analysis of a complex decision situation by constructing a mathematical model of the situation and then performing a large number of iterations in order to determine the probability distribution of outcomes is called A) Sensitivity analysis. B) Expected utility analysis. C) Simulation. D) A decision tree. (Ans.: C) Explanation: Self Explainable.

25 24. A multifactor evaluation process is preferred to the analytic hierarchy process when: A. There is high confidence in determining factor weights without pairwise comparisons. B. There is low confidence in determining factor weights without pairwise comparisons. C. One desires a lesser level of computational analysis. D. One desires a greater level of computational analysis. (Ans.: A) Explanation: Definition of Multifactor Evaluation Process

26 25. Three factors are considered for a decision process. It is desired to have Factor 1 (F1) weighted as 6 times the Factor 2 (F2) weight. F2 should be 3 times the Factor 3 (F3) weight. What importance of weights should be used for a multifactor evaluation process? A. W(F1) = 0.6, W(F2) = 0.3, W(F3) = 0.1 B. W(F1) = 18/22, W(F2) = 3/22. W(F3) = 1/22 C. W(F1) = 1/22, W(F2) = 18/22, W(F3) = 3/22 D. W(F1) = 3/22, W(F2) = 1/22, W(F3) = 18/22 (Ans.: B) Explanation: This is a simple ratio problem. F1:F2 = 6:1; F2:F3 = 3:1; F1:F3 = 18:1. Therefore, F1:F2:F3 = 18:3:1. Thus, W(F1) = 18/22, W(F2) = 3/22. W(F3) = 1/22.