One of Larry's investments is going to mature, and he wants to determine how to invest the proceeds of $30,000. Larry is considering three new investments: a stock mutual fund (SMF), a one-year certificate of deposite (CD), or a nano-technology stock called (NNS). The CD is guaranteed to pay an 8% return. Larry estimates the return on the stock mutual fund (SMF) as 16%, 7%, or -9%, and the return on the nano-technology stock (NNS) as 30%, 5%, or -25%, depending on whether market conditions are good, average, or poor, respectively. Larry also has been collecting financial market information daily and estimates the probabilities of a good, average, and poor market to be 0.25, 0.45, and 0.30, respectively.
Construct a payoff matrix for this problem.
What decision should be made according to Minimax Regret Approach?
What decision should be made according to Expected Value Approach?
What is the EVPI?