Question

Which investment option should Wiley choose if he uses the Equally Likely (LaPlace) criterion?

Use this information to answer the following questions. Evaluate the following Payoff Table. Wiley is considering three investment options for a small inheritance that he just received-stocks, bonds and money markets. The return on his investment will depend on the performance of the economy, which can be strong, moderate or weak. The return for each possible combination is shown on the following table. *Note: the probabilities for each market condition are: Strong = P (0.2), Moderate = P (0.35) and Weak = P (.45). Assume Wiley will use only one investment option.

INVESTMENT	Strong P(0.2)	Average P( .35)	Weak   P(.45)
Stocks	12%	6%	-10%
Bonds	7%	4%	1%
Money Market	4%	3%	2%

		A) 4%
		B) 2%
		C) 13%
		D) 23%
		E) 12%

Answer 1

Which investment option should Wiley choose if he uses the Equally Likely (LaPlace) criterion?

Bonds

INVESTMENT	Strong P(0.2)	Average P( .35)	Weak   P(.45)	Maximax	Maximin	Equally likely
Stocks	2.40%	2.10%	-4.50%	2.40%	-4.50%	0.00%
Bonds	1.40%	1.40%	0.45%	1.40%	0.45%	1.08%
Money Market	0.80%	1.05%	0.90%	1.05%	0.80%	0.92%
Total						2.00%
Option B is Correct