An investor wishes to invest $10,000 in bonds and gold. He knows that the return on the investments will be affected by changes in interest rates. After some analysis, he estimates that the return (in thousands of dollars) at the end of a year will be as indicated in the following payoff matrix:

(A) We assume that fate is a very clever player and will play to reduce the investor’s return as much as possible. Find optimal strategies for both the investor and for “fate.” What is the value of the game?

(B) Find the expected values of the game if the investor continues with his optimal strategy and fate “switches” to the following pure strategies: 

(1) Play only 0% change; 

(2) Play only +1% change; 

(3) Play only -3% change.

Transcribed Image Text:

Change in interest rates (fate) 0% 1 Bonds Gold -1 +1% -3%. - 1 6 2 -3