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An investor who invests in the stock market has become doubtful about the stock market as a good investment. In some cases, it would have
- An investor who invests in the stock market has become doubtful about the stock market as a good investment. In some cases, it would have been better for him to have his money in a bank than in the stock market. During the next year, he must decide whether to invest OMR10,000 in the stock market or in a fixed deposit (FD) in a bank at an interest rate of 9%. If the market is good, he believes that he could get a 14% return on his money. With a fair market, he expects to get an 8% return. If the market is bad, he will most likely get no return at allin other words, the return would be 0%. The investor estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long-run average return.
- Develop a decision table for this problem.
- What is the best decision?
- Calculate the expected value of perfect information and interpret the result.
- The investor is thinking about paying for a marketing company that could predict very accurately whether the market would be good, fair, or poor. What is the maximum amount of money that he should pay to the company?
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