An investor has a certain amount of money available to invest now. Three alternative investments are...

An investor has a certain amount of money available to invest now. Three alternative investments are available. The estimated profits ($) of each investment under each economic condition are indicated in the following payoff table:

INVESTMENT SELECTION

EVENT A B C

Economy declines 500 -2000 -7000

No change 1000 2000 -1000

Economy expands 2000 5000 20000

Based on his own past experience, the investor assigns the following probabilities to each economic condition:

P (Economy declines) = 0.30

P (No change) = 0.50

P (Economy expands) = 0.20

a. determine the optimal action based on the maximax criterion.

b. determine the optimal action based on the maximin criterion.

c.compute the the expected monetary value for each investment

d. compute the expected opportunity loss for each investment

e. based on (c) or (d) which investment would you choose, and why?

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Expert Solution

milcah answered 4 months ago

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