|
Payoff Table
|
|
Alternatives
|
State 1
|
State 2
|
|
Stock 1
|
-200
|
60
|
|
Stock 2
|
40
|
120
|
|
Stock 3
|
160
|
80
|
|
Stock 4
|
-100
|
200
|
|
Opportunity Loss Table
|
|
Alternatives
|
State 1
|
State 2
|
|
Stock 1
|
320
|
140
|
|
Stock 2
|
120
|
80
|
|
Stock 3
|
0
|
120
|
|
Stock 4
|
260
|
0
|
Given the information above,
A. Are any of the stocks clearly inferior choices? (Explain. You can eliminate any inferior choice(s) from the rest of the analysis).
B. What is the alternative chosen using the optimistic (maximax) criterion?
C. What is the alternative chosen using the pessimistic (minimax) criterion?
D. What is the alternative chosen using the minimax regret criterion?
Over the past 40 years, the probability of any given year being a recessionary year is 0.1. Given this information,
E. Calculate the expected monetary value (EMV) for each stock. Which stock would an EMV maximizer choose?
F. Calculate the EVPI (that is, how much the investor should be willing to pay an economist (or a psychic) to tell him, with certainty, next yearAc€?cs state of nature).