If you know the return, then the expected return is that return (since it occurs with probability 1, and all other alternatives (and combinations of alternatives) occur with probability 0)Not sure if this is a basic pre uni question but since I'm covering it at uni I will assume that it fits under the advanced section.
I'm trying to solve a question that asks me to suggest the best investment choice given a payoff table. In the table I am given 4 investments, one of which returns the same amount in all cases, and the other three vary. The question then goes on to say that assuming that the return on one of the remaining three investment classes will be known... which of the four would be the best choice.
The problem that I'm having is figuring out how to calculate the expected profit under perfect information. The definitions that I've seen regarding this are very clear... i.e. it is the sum of the expected profit under uncertainty (easy) and the amount a decision maker is willing to pay to gain perfect information.
To me, the expected profit of perfect information is just the outcome that you predict. i.e. out of lets say 3 possible outcomes, loss, break even and gain (theres 5 in the question but doesn't matter) lets say we know that a gain will take place. Therefore this becomes the expected profit. Question is... if I'm not told which outcome will occur, how do I compare the 4 asset classes and decide the best one?
I found this
Decision theory: Definition from Answers.com
as an example showing how to calculate perfect information, but I didn't understand it as it was rather poorly annotated.
Is this even a mathematical question? I was thinking of answering it along the lines of risk profiles (risk taking, risk neutrality and risk aversion) but I can't help but feel that this is wrong.