Question

In: Statistics and Probability

shir khan is considering investing some money. The following payoff table gives the profit that would...

shir khan is considering investing some money. The following payoff table gives the profit that would be realized during the next year for each of the three investment alternatives. State of Nature Alternative Good Economy Poor Economy Stock Market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000 Probability 0.6 0.4 a) Under Maximax which would be the best investment opportunity? b) Under Maximin which would be the best investment opportunity? c) Under equally likely which would be the best investment opportunity? d) Under Risk which would be the best investment opportunity?

Solutions

Expert Solution

a)

Under Maximax approach, we choose the maximum of maximum payoffs.

The maximum payoffs for Stock Market is 80,000.

The maximum payoffs for Bonds is 30,000.

The maximum payoffs for CDs is 23,000.

The maximum of maximum payoffs is 80,000 for Stock Market.

The best investment alternatives under Maximax is Stock Market.

b)

Under Maximin approach, we choose the maximum of minimum payoffs.

The minimum payoffs for Stock Market is -20,000 .

The minimum payoffs for Bonds is 20,000.

The minimum payoffs for CDs is 23,000.

The maximum of minimum payoffs is 23,000 for CDs

The best investment alternatives under Minimax is CDs.

c)

Under equally likely,

The payoff for Stock Market = (80,000 -20,000) / 2 = 30,000

The payoff for Bonds = (30,000 + 20,000) / 2 = 25,000

The payoff for CDs = (23,000 + 23,000) / 2 = 23,000

The maximum payoffs is 30,000 for Stock Market.

The best investment alternatives under equally likely is Stock Market.

d)

Expected monetary value (EMV) for Stock Market = 0.6 * 80,000 - 0.4 * 20,000 = 40,000

Expected monetary value (EMV) for Bonds = 0.6 * 30,000 + 0.4 * 20,000  = 26,000

Expected monetary value (EMV) for CDs = 0.6 * 23,000 + 0.4 * 23,000 = 23,000

The maximum EMV is 40,000 for Stock Market.

The best investment alternatives under risk is Stock Market.


Related Solutions

Mickey Johnson is considering investing some money that he inherited. The following payoff table gives the...
Mickey Johnson is considering investing some money that he inherited. The following payoff table gives the               profits that would be realized during the next year for each of three investment alternatives Mickey is               considering (You should calculate the results to support your conclusions to get the credit): (10 points)                                     State of Nature Decision Alternative Good Economy Poor Economy Stock market 50,000 -20,000 Bonds 30,000 15,000 CDs 20,000 20,000 Probability 0.8 0.2 What decision would maximize expected profits?...
The following payoff table shows the profit for a decision problem with two states of nature...
The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives: State of Nature Decision Alternative s1 s2 d1 10 1 d2 7 3 (a) Suppose P(s1)=0.2 and P(s2)=0.8. What is the best decision using the expected value approach? Round your answer in one decimal place. The best decision is decision alternative (- Select your answer -d1 /d2) with an expected value of. (b) Perform sensitivity analysis on the payoffs for...
The following payoff table shows profit for a decision analysis problem with two decision alternatives and...
The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature. Decision Alternative States of Nature s1 s2 s3 d1 240 90 15 d2 90 90 65 Suppose that the decision maker obtained the probabilities P(s1) = 0.65, P(s2) = 0.15, and P(s3) = 0.20. Use the expected value approach to determine the optimal decision. EV(d1) = EV(d2) = The optimal decision is  ? d₁ d₂
The following is a payoff table giving costs for various situations. What decision would an optimist...
The following is a payoff table giving costs for various situations. What decision would an optimist make? State 1 State 2 State 3 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55
Having recently inherited some money from a distant relative,you are considering investing the funds in...
Having recently inherited some money from a distant relative, you are considering investing the funds in financial assets. You are aware that financial assets exhibit four main attributes. List and discuss these attributes. In your answer give examples to explain your points. (Marks 4) (b) Tim is going to retire in 10 years. He is planning to build a retirement fund that he would like to receive at the end of 10 years from now. Company Y offers a package...
) Having recently inherited some money from a distant relative, you are considering investing the funds...
) Having recently inherited some money from a distant relative, you are considering investing the funds in financial assets. You are aware that financial assets exhibit four main attributes. List and discuss these attributes. In your answer give examples to explain your points.                                                                                              (Marks 4) (b) John is going to retire in 10 years. He is planning to build a retirement fund that he would like to receive at the end of 10 years from now. Company X offers a package...
You are considering investing some of the money you inherited in bonds. You have identified one...
You are considering investing some of the money you inherited in bonds. You have identified one corporate bond (CB01) and two government bonds (GBo2 and GB03). All three bonds have a par value of R1000. The corporate bond CB01 offers a coupon rate of 13% per annum, while the two government bonds GB02 and GB03 offer coupon rates of 11% and 12% respectively. All three bonds pay coupons semi-annually and have a face value of R1000. Your intentions are to...
Are the profit and payoff of buying an index and buying a put the same as investing in zero-coupon bonds and buying a call?
Given that a 950-strike call has a premium of $120.405 and a 950-strike put has a premium of $51.777 and the 6-month interest rate is 2%. Suppose you buy the S&R index for $1000 and buy a 950-strike put. What are the profit and payoff for this position. Is this the same profit and payoff as investing $931.37 in a zero-coupon bonds and buying a 950-strike call.
1. Which of the following is right: A. "Out-of-the-money” option gives options writer profit which exceeds...
1. Which of the following is right: A. "Out-of-the-money” option gives options writer profit which exceeds option premium. B. “at-the-money” is the breakeven point of negative and positive payoffs for option holders. C. “in-the-money” means option holders will definitely profit by exercising the option. D. Option writer earns option premiums as payoffs when the option is “at-the-money”. 2. What is the main difference between the forward contract and the future contract? A. Forward contract looks forward, but future contract looks...
You are considering investing your money in a bank certificate of deposit (that is, lending money...
You are considering investing your money in a bank certificate of deposit (that is, lending money to a bank). You have received the following quotations from four banks. Which bank should you select? Bank A: APR of 3.48 percent compounded annually Bank B: APR of 3.44 compounded semi-annually Bank C: APR of 3.36 compounded monthly Bank D: APR of 3.38 percent compounded daily Bank E: APR of 3.41 compounded continuously Group of answer choices Bank C Bank E Bank D...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT