Any of the stocks clearly inferior choices

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Reference no: EM131125159

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).

Reference no: EM131125159

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