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Note that the investor can place all of his available funds

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Consider an investor with $10,000 available to invest. He has the following options regarding the allocationof his available funds: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rateof return; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or10%; or (3) he can invest in a more risky stock, where the possible annual rates of return are 1%, 9%,or 17%. Note that the investor can place all of his available funds in any one of these options, or he can split his $10,000 into two $5000 investments in any two of these options. The joint probability distribution of the possible return rates for the two stocks is given

Investment data










Risky stock return (R)


R=1% R=9% R=17%
Safe stock return (S) S=6% 0.10 0.05 0.10

S=8% 0.25 0.05 0.20

S=10% 0.10 0.05 0.10

a.) Just build the payoff matrix model in each caseb.)compute a regret (opportunity loss) matrix.HINT:Your payoff matrix should have six strategies and nine states of nature.

Reference no: EM13582045

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