Question
. An investor is considering three alternatives-a certificate of deposit, a low risk stock fund, and a high risk stock fund- for a $20,000 investment.
. An investor is considering three alternatives-a certificate of deposit, a low risk stock fund, and a high risk stock fund- for a $20,000 investment. The investor considers three possible states of nature
S1: Strong stock market, S2: Moderate stock market, S3: Weak stock market
The payoff table (in dollars) is as follows:
Action | States of nature | ||
Possible investment alternative | S1 | S2 | S3 |
Certificate of deposit | 1,200 | 1,200 | 1,200 |
Low- risk stock | 4,300 | 1,200 | -600 |
High-risk stock fund | 6,600 | 800 | -1500 |
(i) Which action is selected by the investor if he is a risk seeker? [2Marks]
(ii) Which action is selected by the investor if he is a risk averter? [2Marks]
(iii) Which criteria is selected by the minim ax regret criterion? [3Marks]
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