Question

1. An investor has the opportunity to buy one of four different stocks.  Each stock is currently selling for $50 per share, and the investor will choose one of the stocks and purchase 20 shares of one of the stocks and sell them one year later.  (Hence, the investor is making an initial investment of 20*$50=$1000.) When buying the stock, the investor doesn’t know whether or not there will be a recession when she goes to sell the 20 shares of stock in one year. If there is a recession (state 1) the selling prices will be $45, $52, $58, and $40. If there is no recession (state 2), the selling prices will be $60, $56, $54, and $53.

Payoff Table
Alternatives	State 1	State 2
Stock 1
Stock 2
Stock 3
Stock 4

Opportunity Loss Table
Alternatives	State 1	State 2
Stock 1
Stock 2
Stock 3
Stock 4

a. complete the payoff and opportunity loss tables reflecting profits after selling the 20 shares of stock at the end of the year.

b. are any of the stocks clearly inferior choices?

c. What is the alternative chosen using the optimistic criterion?

d. what is the alternative chosen using the pessimistic criterion?

e. what is the alternative chosen using the minimax regret criterion?

Answer 1