Consider again the investor’s decision problem described in Problem 5. Use the PrecisionTree add-in to depict this decision problem as an influence diagram. Then use your influence diagram representation to find the course of action that maximizes the investor’s expected earnings in | year from the given investment opportunities. Summarize your results.

Problem 5

Consider an investor with $10,000 available to invest. He has the following options regarding the allocation of his available funds: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rate of return; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or 10%; or (3) he can invest in a more risky stock where the possible annual rates of return are 1%, 9%, or 17%. Note that the investor can place all of his available funds in any one of these options, or he can split his $10,000 into two $5000 investments in any two of these options. The joint probability distribution of the possible return rates for the two aforementioned stocks is given in Table 7.8 (page 310).

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TABLE 7.8 Joint Probability Distribution of Safe and Risky Stock Return Rates Safe Stock Return Rates (S)/ Risky Stock Return Rates (R) S = 6% S = 8% S = 10% R = 1% 0.10 0.25 0.10 R = 9% 0.05 0.05 0.05 R = 17% 0.10 0.20 0.10