What is the optimal investment plan based on the advisor’s prediction state?

Problem 68

Sandy is going to make investment for the $10,000 which she deposited for the past 2 year. Her financial advisor presented the following tables which show (1) expected profits (in $10,000’s) for various states of nature and their probabilities and (2) the advisor’s prediction ability about the state of nature.

Revise the prior probabilities in light of advisor’s prediction ability.

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Probability of nature Bonds Stocks Advisor's Prediction State of nature Recession S 0.2 -5.0 -30.0 Recession Z Flat Z Boom Z3 Flat S 0.5 1.0 3.0 State of nature Recession S 0.7 0.2 0.1 Boom S3 0.3 10.0 20.0 Flat S 0.2 0.6 0.2 EMV 2.5 1.5 Boom S3 0.1 0.1 0.8