25 Jul WHAT IS THE ALTERNATIVE CHOSEN USING THE MINIMAX REGRET CRITERION?
An investor has the opportunity to buy one of four different stocks. Each stock is currently selling Show more An investor has the opportunity to buy one of four different stocks. Each stock is currently selling for $50 per share and the investor will purchase 20 shares of one of the stocks and sell them one year later. If there is a recession (state 1) the selling prices will be $40 $52 $58 and $45. If there is no recession the selling prices will be $53 $56 $54 and $60. Complete the payoff table and opportunity loss table below. Payoff Table Payoff Table Payoff Table Alternatives State 1 State 2 Stock 1 Stock 2 Stock 3 Stock 4 Opportunity Loss Table Opportunity Loss Table Opportunity Loss Table Alternatives State 1 State 2 Stock 1 Stock 2 Stock 3 Stock 4 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 years state of nature). Show less
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