Ziang Zameen has always been proud of his personal investment strategies and has
ID: 3125626 • Letter: Z
Question
Ziang Zameen has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however, Allen has become very concerned about the stock market as a good investment. In some cases it would have been better for Ziang to have his money in a bank than in the market. During the next year, Ziang must decide whether to invest $10,000 in the stock market or in a certificate of deposit (CD) at an interest rate of 9%. If the market is good, Ziang believes that he could get a 14% return on his money. With a fair market, he expects to get an 8% return. If the market is bad, he will most likely get no return at all – in other words, the return would be 0%. Ziang estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long-run average return.
a.Develop a decision table for his problem.
b.What is the best decision?
Explanation / Answer
Develop a decision table for his problem.
What is the best decision?
Stocks expected return = 880 or 8.8%
CD return = 900 or 9%
The best decision is, Ziang Zameen should buy CD to maximize his return.
Stock Vs CD Alternative Good Economy Fair Economy Bad Economy Buy stock 560 320 0 Buy CD 900 900 900 CD Return 9% 9% 9% Market Return 14% 8% 0% Probability 0.4 0.4 0.2 Investment Amount 10000 10000 10000Related Questions
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