Financial Case Study: Geo-Star Company

Q1:
Assume that all probabilities and outcomes are accurate and certain.
First, there is a decision, which is whether we need Geo-Star to provide consultation. If we need the consulting, we have to pay them $0.1 m + 10% of the total uranium found. After we choosing Geo-Star, the company will provide two reports, favourable (60%) and unfavourable (40%). For favourable report, we can choose dig or not dig. If not dig, we will lose totally $ 0.1m. if dig, 90% get substantial amounts of uranium 25 tones and 10% get non-substantial amounts of uranium 5 tones. However, if the report is unfavourable, we also can choose dig or not. If not dig, we will lose totally $ 0.1m. if dig, 15% get substantial amounts of uranium 25 tones and 85% get non-substantial amounts of uranium 5 tones. It is similar for the situation which is without consulting. If …show more content…
Whether second order stochastic dominance (SSD) exists is necessary. Assume the investors are risk hater. The CDF of investment 1 rising longer than investment 2, it is only possible that investment 2 dominates investment 1 by SSD. For investment 2 dominates investment 1 we require for all . For the first intersection the integral is equal to (120-60) (0.2-0.1) =6. At the second intersection the integral is equals to Area 1- area 2. Area 2 is equal to (150-120) (0.4-0.2) =6, and therefore the integral is equal to 6-6=0. The third intersection the integral is equals to Area 3+ area 1-area 2. Area 3 is equal to (210-150) *(0.6-0.4) =12, and therefore the integral is equal to 12+6-6=12. The fourth intersection the integral is equals to area 3+ area 1-area 2-area4. Area 4 is equals to (240-210) * (0.7-0.6) = 3, therefore, the integral is equal to 12+6-6-3=9. Finally, at the last intersection area 5 (300-240) *(0.8-0.7) =6 is added to the value of the integral. for all has been verified and can conclude that investment 2 dominates investment 1 by