Question
You are trying to decide between putting your money in a savings account or investing it in a growth fund. At the end of a
You are trying to decide between putting your money in a savings account or investing it in a growth fund. At the end of a year, the savings account will have $100. The growth fund may go up or down over the year as market conditions change. If the market goes up, the growth fund would have $150; if the market goes down, the growth fund would have only $50 at the end of a year. a)What would a conservative (maximin) decision maker do? b)What would a risk taking (maximum) decision maker do? c)What is the best choice if the probabilities of the market going up or down are 50%/50%? (equal likelihood) d)What is the best choice if the probabilities of the market going up or down are 80%/20%? (expected value) e)What is the best choice if the probabilities of the market going up or down are 20%/80%? (expected value) f)What is the expected value of perfect information (EVPI) about market conditions?
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