QUESTION FOUR A trust officer for a major banking institution is planning the investment of a $ 1 million family trust for the coming year. The trust officer has identified a portfolio of stocks and another group of bonds that might be selected for investment. The family trust can be invested in stocks or bonds exclusively, or a mix of the two. This trust officer prefers to divide the funds in increments of 10 percent; that is, the family trust may be split 100 percent stocks /0 percent bonds, 90 percent stocks /10 percent bonds, 80 percent stocks /20 percent bonds, and so on. The trust officer has evaluated the relationship between the yields on the different investments and general economic conditions. Her judgment is as follows: 1) If the next year is characterized by solid growth in the economy, bonds will yield 12 percent and stocks 20 percent. 2 ) If the next year is characterized by inflation, bonds will yield 18 percent and stocks 10 percent. 3) If the next year is characterized by stagnation, bonds will yield 12 percent and stocks 8 percent. Revision Questions and Answers 27 a) Formulate a payoff table where payoffs represent the annual yield, in dollars, associated with the different investment strategies and the occurrence of various economic conditions b) Determine the optimal investment strategy using the max-max, max-min, Hurwicz (oc= 0.4), equally likely, and regret criteria. c) Suppose that a leading economic forecasting firm projects P(solid growth)= 0.4, P(inflation)=0.25, and P (stagnation)= 0.35. Use the expected value criterion to select the appropriate strategy. d) What is the expected value with perfect information