Question
One of Philip Mahns investments is going to mature, and he wants to determine how to invest the proceeds of $30,000. Philip is considering two
One of Philip Mahns investments is going to mature, and he wants to determine how to invest the proceeds of $30,000. Philip is considering two new investments: a stock mutual fund and a one-year certificate of deposit (CD). The CD is guaranteed to pay an 8% return. Philip estimates the return on the stock mutual fund as 16%, 9%, or -2%, depending on whether market conditions are good, average, or poor, respectively. Philip estimates the probability of a good, average, and poor market to be 0.1, 0.85, and 0.05, respectively.
a. Construct a payoff matrix for this problem.
b. What decision should be made according to the maximax decision rule?
c. What decision should be made according to the maximin decision rule?
d. What decision should be made according to the minimax regret decision rule?
e. What decision should be made according to the EMV decision rule?
NOTE: Construct the payoff matrix in terms of percentage returns. Also you should show all your work. (steps from excel
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