An investor intends to purchase stock in one of three companies. Company A is very sensitive to the overall national economy, company C is relatively insensitive to the economic environment, and company B is about average. The investor has constructed the following payoff table for his profit, in thousands of dollars.

Using the opportunity loss approach, which alternative will be selected, and what is its expected opportunity loss? What is the most the investor should be willing to pay for perfect information about the future state of the economy?

Transcribed Image Text:

The State of the Economy Will Be Weak Moderate Strong (0.4) $30 Invest in company A Invest in company B Invest in company C (0.2) -$40 -$20 $%24 (0.4) $60 $45 $30 $20 $28