Decision tree

We also used the decision tree approach to model the three investment decisions that
Mr. Raza had. The three alternatives were shown as decision nodes. The market
uncertainties were represented by chance nodes. The market could go up down or stay
the same. However, the probability of the market staying the same was the highest for
all alternatives. Mr. Raza also had the option of availing consultation. Three
consultants provided their expert opinion on the investment problem at hand. He
could also make the decision without the consultants or choose o do nothing with his
money.

Without consultants

By folding back the tree and multiplying the different probabilities with the incomes
we can see the EMV of the property business is the highest.
Investing with consultants
There is a possibility that the actual market conditions differ from the information
provided by the consultants. Therefore, the probabilities that the market goes up, stays
same, and goes down have chance nodes to further represent the probabilities of the
actual market conditions. Before we develop a tree for the alternatives, we conduct a
Bayesian revision and convert the prior probabilities given to us into posterior
probabilities. We calculate the probability that the market condition is actually going
to be X given that consultant says that the conditions are going to be X.

Consultant 1: advises us on stock exchange and property

Consultant 2: advises us on stock exchange and careem
Consultant 3: advises us on Careem and property

We are given the probabilities regarding the outcome (NPV) of each alternative in different
market conditions. We simulated all these probabilities using triangular distributions, the risk
triang function, such that the most likely values were considered to be those ones given to us.
When the market condition is flat, the return is equal to the expected NPV calculated. We used
simulation to calculate the percentages of return above or below the expected value depending if
the market is in good condition or bad condition.
Results

no consultants

First, we ran a simulation on the “no consultant” branch of the decision tree. Our risk output cells
were the decision nodes of “Careem market”, shown in red, property market shown in blue and
the stocks market shown in green. Mr. Raza must make this decision himself and it depends on
his attitude towards risk. If he is a risk averse person and chooses to go towards the highest
possible minimum value, he would choose to invest in the stock market since it has the highest
possible minimum value of -3,201,494.88 as shown in the figure.
If he was risk neutral, he would focus on the mean values and the property business would be his
choice since it has the highest mean value of pkr 14,283,906.
 -1.0
If he was risk seeking, he would make his judgement based on the highest maximum value and
would again choose the property option which has the value of pkr39,461,959.

No Consultant
Spearman Rank Correlation Coefficients

Property NPV / Year 0 -0.90

Stock NPV / Year 0 -0.18
Cost of 1 Apartment (Approximate) / Year 10 0.10
Cost of 1 Apartment (Approximate) / Year 2 0.10
Cost of 1 Apartment (Approximate) / Year 9 0.08
Cost of 1 Apartment (Approximate) / Year 5 0.07
Profit - Stock Investment / Year 6 -0.07
Yearly Stock Value / Year 5 @RISK Course Version 0.07
Rental Income per Apartment/month / Year 9 LUMS -0.06
Rental Income per Apartment/month / Year 5 0.06
Market Condition Down / EMV 0.06
Driver Salary per Car/month / Year 6 -0.05
Petrol Usage per Car/month / Year 2 0.05
Careem NPV / Year 0 0.05
Market Condition Up / Stock Market 0.05
Repair & Maintenance per Car/month / Year 1 -0.05

The tornado chart here shows that the most sensitive parameter is the property NPV followed by
profit of the stock investment. This makes sense since the standard deviation of the property
business is higher than that of the other two alternatives as seen in the previous figure.

Results

Consultants
 -0.2
Consultant 3

-0.4
Spearman Rank Correlation Coefficients

Property NPV / Year 0 -0.98

Cost of 1 Apartment (Approximate) / Year 10 0.11
Cost of 1 Apartment (Approximate) / Year 2 0.09

-0.6
Cost of 1 Apartment (Approximate) / Year 5 0.08
Profit - Stock Investment / Year 6 -0.07
Cost of 1 Apartment (Approximate) / Year 9 0.07
Rental Income per Apartment/month / Year 9 -0.07
Market Condition Down / EMV @RISK Course Version 0.07

-0.8
Rental Income per Apartment/month / Year 5 LUMS 0.07
Maintenance per Apartment/month / Year 7 -0.07
Driver Salary per Car/month / Year 6 -0.06
Careem NPV / Year 0 0.06
Maintenance per Apartment/month / Year 6 -0.06

-1.0
Cost of 1 Apartment (Approximate) / Year 4 0.05
Cost of 1 Apartment (Approximate) / Year 3 0.05
Total Earnings from the Car/month / Year 4 0.05

Consultant 3 advises us on careem and property markets. According to the tornado diagram for
consultant 3 the most sensitive parameter is the property NPV followed by cost of 1 apartment in
year 10.

Consultant 2
Spearman Rank Correlation Coefficients

Stock NPV / Year 0 -0.91

Yearly Stock Value / Year 8 0.15
Yearly Stock Value / Year 9 0.14
Yearly Stock Value / Year 5 0.14
Yearly Stock Value / Year 3 0.14
Yearly Stock Value / Year 10 0.12
Yearly Stock Value / Year 4 0.12
Profit - Stock Investment / Year 5 @RISK Course Version 0.11
Yearly Stock Value / Year 7 LUMS 0.11
Cost of 1 Apartment (Approximate) / Year 5 -0.09
Repair & Maintenance per Car/month / Year 3 -0.09
Total Earnings from the Car/month / Year 5 0.09
Yearly Stock Value / Year 2 0.09
Yearly Stock Value / Year 6 0.08
Repair & Maintenance per Car/month / Year 9 -0.07
Repair & Maintenance per Car/month / Year 4 0.07

Consultant 2 advises us on stock exchange and careem. Consultant 2’s most sensitive parameters
are the stock NPV and then the yearly stock values of year 8 and 9. Most variables here are from
the stock market alternative along with a few from the careem market.
 Consultant 1
Spearman Rank Correlation Coefficients

Property NPV / Year 0 -0.90

Stock NPV / Year 0 -0.18
Cost of 1 Apartment (Approximate) / Year 10 0.10
Cost of 1 Apartment (Approximate) / Year 2 0.10
Cost of 1 Apartment (Approximate) / Year 9 0.09
Cost of 1 Apartment (Approximate) / Year 5 0.07
Profit - Stock Investment / Year 6 -0.07
Yearly Stock Value / Year 5 @RISK Course Version 0.07
Rental Income per Apartment/month / Year 9 LUMS -0.06
Rental Income per Apartment/month / Year 5 0.06
Market Condition Down / EMV 0.06
Driver Salary per Car/month / Year 6 -0.06
Careem NPV / Year 0 0.05
Petrol Usage per Car/month / Year 2 0.05
Market Condition Up / Stock Market 0.05
Repair & Maintenance per Car/month / Year 1 -0.05

Consultant 1 advises us on stock exchange and property. The property NPV and the stock NPV are
the most sensitive parameters of consultant 1.