DMUU :: PRACTICE 2:

A stock market advisory service offers three investments portfolios for one of its customers. All portfolios have the same investment cost. Portfolio A contains speculative stocks, which aim for capital gain through price appreciation. Portfolio B is made up of stocks of stable companies that pay good dividends overt the long run. Portfolio C comprises stocks with a moderate potential for growth and a moderate yield of dividends.

The customer has enough money to invest in only one of these three portfolios for a period of one year. The net return on investments will depend on whether the economy during the period will be in a stage of inflation, recession, or depression. The net potential gains or losses are calculated as follows:

STATES OF NATURE TABLE NUMBERS in ten-thousands:

		Inflation	Recession	Depression
ALTERNATIVES	Portfolio A	$ 80	$ 50	$ 50
	Portfolio B	$ 70	$ 45	$ 30
	Portfolio C	$ 60	$ 30	$ 20

1. What would be the decision according to (1) Maximax (optimism); (2) Maximin (pessimism); (3) Realism where = .7;

(4) Equal Likelihood; and, (5) Minimizing Regret? Be sure to show work and indicate the recommended alternative each time.

AFTER SHOWING ALL WORK, SUMMARIZE/RECAP: Please fill in this chart with a "Letter Answer" and a "Reason" for each DMUU and give an Overall DMUU: ________________ (Give Reasons!)

DMUU: Letter Answer Reason

Perfect Optimism: MXMX
Perfect Pessimism: MXMN
Optimism at =___: REALISM
Equal Likelihood: EQL LK'HD
Minimizing Regret: REGRET