Chapter 9.5, Problem 19E

INVESTMENT STRATEGIES The Maxwell’s have decided to invest $\$40,000$ in the common stocks of two companies listed on the New York Stock Exchange. One of the companies derives its revenue mainly from its worldwide operation of a chain of hotels, whereas the other company is a domestic major brewery. It is expected that if the economy is in a state of growth, then the hotel stock should outperform the brewery stock; however, the brewery stock is expected to hold its own better than the hotel stock in a recessionary period. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy:

$\begin{array}{l}\begin{array}{cc}\begin{array}{l}Expanding\\ economy\end{array}& \begin{array}{l}Economic\\ recession\end{array}\end{array}\\ \begin{array}{c}Investmentinhotelstock\\ Investmentinbrewerystock\end{array}\left[\begin{array}{cc}25& -5\\ 10& 15\end{array}\right]\end{array}$

a. Determine the optimal investment strategy for the Maxwell’s investment of $\$40,000$.

b. What profit can the Maxwell’s expect to make on their investments if they use their optimal investment strategy?