An investor has a certain amount of money available to invest now. Three alternative investments are available. The estimated profit in Kwacha of each investment under each economic condition are indicated in the following payoff table: Event Investment Selection A B C Economy declines 500 -2000 -7000 No charge 1000 2000 -1000 Economy Expand 2000 5000 20,000 Based on his own past experience, the investor assigns the following probabilities to each economic condition: ( ) ( ) ( ) Economy declines 0.30 No change 0.50 Economy expands 0.20 P P P = = = i. Determine the optimal action based on the maximax criterion ii. Determine the optimal action based on the maximin criterion iii. Compute the expected monetary value (EMV) for each investment iv. Compute the expected opportunity loss (EOL) for each investment v. Explain the meaning of the expected value of perfect information (EVPI) in this problem vi. Based on the results of (iii) and (iv), which investment would you choose? vii. Compute the coefficient of variation for each investment. viii. Compute the return-to-risk ratio (RTRR) for each investment. ix. Based on (vii) and (viii), what investment would you choose? x. Compare the results of (vi) and (ix) and explain any differences
An investor has a certain amount of money available to invest now. Three alternative investments
are available. The estimated profit in Kwacha of each investment under each economic condition
are indicated in the following payoff table:
Event Investment Selection
A B C
Economy declines 500 -2000 -7000
No charge 1000 2000 -1000
Economy Expand 2000 5000 20,000
Based on his own past experience, the investor assigns the following probabilities to each
economic condition:
( )
( )
( )
Economy declines 0.30
No change 0.50
Economy expands 0.20
P
P
P
=
=
=
i. Determine the optimal action based on the maximax criterion
ii. Determine the optimal action based on the maximin criterion
iii. Compute the expected monetary value (EMV) for each investment
iv. Compute the expected opportunity loss (EOL) for each investment
v. Explain the meaning of the expected value of perfect information (EVPI) in this
problem
vi. Based on the results of (iii) and (iv), which investment would you choose?
vii. Compute the coefficient of variation for each investment.
viii. Compute the return-to-risk ratio (RTRR) for each investment.
ix. Based on (vii) and (viii), what investment would you choose?
x. Compare the results of (vi) and (ix) and explain any differences
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1. Explain the meaning of the expected value of perfect information (EVPI) in this problem. Based on the results of (iii) and (iv), which investment would you choose?
2. Compute the coefficient of variation, the return-to-risk ratio (RTRR) for each investment. Based on (vii) and (viii), what investment would you choose? Compare the results of (vi) and (ix) and explain any differences
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