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Show which alternative maximizes expected value

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You are considering three investment alternatives for some spare cash: Old Reliable Corporation stock (A1), Fly-By-Nite Air Cargo Company stock (A2), and a federally insured savings certificate (A3). You expect the economy will either "boom" (N1) or "bust" (N2), and you estimate that a boom is more likely (p1=0.6) than a bust (p2=0.4). Outcomes for the three alternatives are expected to be (1) $2,000 in boom or $500 in bust for ORC; (2) $6,000 in boom but $-5,000 (loss) in bust for FBN; and (3) $1,200 for the certificate in either case. Set up a payoff table (decision matrix) for this problem and show which alternative maximizes expected value.

Reference no: EM13848847

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