An investor is considering 4 investments, A, B, C and leaving his money in the b

Question

An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%. A B C D 1 Payoff Matrix 2 3 Economy 4 Investment Decline Expand EMV 5 A -10 90 6 B 20 50 7 C 40 45 8 Bank 15 20 9 10 Probability 0.7 0.3 Payoffs ____ 13. Refer to Scenario 15-3. What decision should be made according to the expected monetary value decision rule? a. A b. B c. C d. Bank

Explanation / Answer

An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%.

A B C D
1 Payoff Matrix
2
3 Economy
4 Investment Decline Expand EMV
5 A -10 90
6 B 20 50
7 C 40 45
8 Bank 15 20
9
10 Probability 0.7 0.3
Payoffs

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