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Question 1: Saul Goodman is considering three investment options for a small inheritance that she has just received-stocks, bonds, and money market. The return on her investment will depend on the performance of the economy, which can be strong, average, or weak. The returns for each possible combination are shown in the following table: Investment Strong Average Weak Stocks 12% 6% -10% Bonds 7% 1% Money Market 4% 3% 2% Assume that Saul will choose only one of the investment options. 1. Which investment should Saul choose if she uses the maximax criterion? 2. Which investment should Saul choose if she uses the maximin criterion? ili 3. Which investment should Saul choose if she uses the equally likely criterion? 1 4. Which investment should Saul choose if she uses the criterion of realism with a = 0.5? I 5. Which investment should Saul choose if she uses the minimax regret criterion? After reading about economic predictions, Saul Goodman has assigned the probability that the economy will be strong, average, and weak at 0.2, 0.35, and 0.45, respectively. 6. Using EMVS, what option should Saul choose? What is the maximum EMV? 7. Using EOL, what option should Saul choose? What is the minimum EOL? 8. Compute the EVPI and show that it is the same as the minimum EOL. Use EXCEL (Homework 3-01) to solve the questions above. Search File Home Insert Draw Page Layout Formulas Data Review View Developer Help Power Pivot Arial 10 ' ab General LO Paste BIU a. A 3 $ %) 48 Conditional Format as Co Formatting Table Styles Clipboard Font Alignment Number Styles 140 fc Cell Style L A color make im the sheet (d) Hurwicz Realism Choice a = 0.5 B IDLE F G H J 1 Question 1 (1-5): Soul Goodman 2 3 PAYOFFS Outcomes (a) Maximax (b) Maximin (c) Equally Likely 4 Alternatives Strong Average Weak Maximum Choice Minimum Choice Average Choice 5 Stocks 12% 6% -10% 6 Bonds 7% 4% 1% 7 Money Market 4% 3% 2% 8 9 10 REGRET Outcomes Minimax 11 Alternatives Strong Average Weak Maximum Choice 12 Stocks 13 Bonds 14 Money Market 15 16 17 18 19 Question 1 (1 to 5) Question1 (6 to 8) + Type here to search % .00 0 Formatting Clipboard Font Alignment Number St C40 3 E F G H EMV Choice B D 1 Question 1 (6-8): Soul Goodman 2 3 PAYOFFS Outcomes 4 Alternatives Strong Average Weak 5 Stocks 12% 6% -10% 6 Bonds 7% 4% 1% 7 Money Market 4% 3% 2% 8 Probability 0.20 0.35 0.45 9 10 Best outcome 11 12 Expected Value WITH Perfect Information (EVWPI) = 13 Best Expected Monetary Value (EMV) = 14 Expected Value OF Perfect Information (EVPI) = 15 16 REGRET Outcomes 17 Alternatives Strong Average Weak 18 Stocks 0% 0% 12% 19 Bonds 5% 2% 1% 20 Money Market 8% 3% 0% 21 Probability 0.20 0.35 0.45) Question 1 (1 to 5) Question 1 (6 to 8) + EOL Choice Type here to search