A stock market advisory service offers three investments
portfolios for one of its customers. All portfolios have
the same investment cost. Portfolio A contains
speculative stocks, which aim for capital gain through price
appreciation. Portfolio B is made up of stocks of stable companies
that pay good dividends overt the long run. Portfolio C
comprises stocks with a moderate potential for growth and a
moderate yield of dividends.
The customer has enough money to invest in only one of these
three portfolios for a period of one year. The net
return on investments will depend on whether the economy during the
period will be in a stage of inflation, recession, or
depression. The net potential gains or losses are
calculated as follows:
STATES OF NATURE TABLE
NUMBERS in ten-thousands:
⇓
Inflation
Recession
Depression
ALTERNATIVES
Portfolio A
$ 80
$ 50
$ – 50
Portfolio B
$ 70
$ 45
$ – 30
Portfolio C
$ 60
$ 30
$ – 20
1. What would be the decision according
to (1) Maximax
(optimism); (2) Maximin
(pessimism); (3) Realism where α =
.7;
(4) Equal Likelihood;
and, (5) Minimizing Regret? Be sure
to show work and indicate the
recommended alternative each time.
AFTER SHOWING ALL
WORK, SUMMARIZE/RECAP:
DMUU:
Letter Answer
Reason
Perfect Optimism: MXMX
Perfect Pessimism:
MXMN
Optimism at α =___: REALISM
Equal Likelihood: EQL LK'HD
Minimizing Regret: REGRET
Overall DMUU: ________________ (Give
Reasons!)