Now suppose the investor in question 26 assigns probabilities of .3 to low growth, .4 to normal growth, and .3 to high growth. Use the expected monetary value criterion to determine which investment should be chosen.

Question 26

An investor wants to choose among three investment alternatives: a passbook savings account, a government bond fund, and a growth stock fund. The payoffs for a $20,000 investment are given in the following table.

(a) Which investment does applying the minimax regret criterion instruct us to choose?

(b) Which investment does applying the maximin criterion instruct us to choose?

Transcribed Image Text:

Investment Savings account Bond fund Stock fund State of nature Low growth $1,000 $1,500 $500 Normal growth $1,000 $1,000 $1,200 High growth $1,000 $800 $1,500