Solve 4.10

4.9 You are considering three investment alternatives for some spare cash: Alrajhi stock (A1), Jarir stock (A2), and a saving account (A3). You expect the economy will either "boom" (N1) or "bust" (N2), and you estimate that a boom is more likely (p1=0.6) than a bust (p2=0.4). Outcomes for the three alternatives are expected to be (1) $2000 in boom or $500 in bust for Alrajhi stock; (2) $600 in boom but $500 (loss) in bust for Jarir stock: and (3) $1200 for the saving account in either case. Set up a payoff table (decision matrix) for this problem and show which alternative maximizes expected value. Solution 4.10 If you have no idea of the economic probabilities pj, in question 4.9, what would be your decision based on uncertainty using (a) maximax, (b) maximin, (c) equally likely, and (d) minimax regret assumptions. Solution