Question

Jillian Smith has come into an inheritance from her grandparents. She is attempting to decide among several investment alternatives. The return after one year is dependent primarily on the interest rate during the next year. The rate is currently 7%, and she anticipates it will stay the same or go up or down by at most 2%. For the various investment alternatives, the returns (in $10000) for each interest rate that might be in effect are shown in the following table.

			Interest Rates
Investments	5%	6%	7%	8%	9%
MMFund	1.7	2.8	3	3.6	4.5
Stock Growth fund	-5	-3	3.5	5	7.5
Bond fund	5	4	3.5	3	2
Government fund	4	3.6	3.2	2.8	2.1
Risk fund	-12	-7	4.2	9.3	16.7
Savings bonds	3	3	3.2	3.4	3.5

Determine the best investment using the following decision criteria (and here you want to maximize payoff).

• Maximax
• Maximin
• Minimax Regret
• Equal Likelihood
• Now assume Jillian, after doing some research, has been able to assign probabilities to each of the possible interest rates during the next year as follows:

• Interest Rate	5%	6%	7%	8%	9%
  Probability	.1	.2	.4	.2	.1

  Using expected payoffs determine her best investment decision.

Answer 1

Decision criteria	Decision
maximax	Risk Fund
Maximin	Savings bonds
Minimax regret	Stock Growth fund
Equal likelihood	Bond fund
Expected payoff	Bond fund

Calculation

Formula