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September 20, 2014

Homework Help: Decision Criteria

Posted by Deana on Sunday, September 25, 2011 at 9:58am.

You have available five different investment strategies and their respective payoffs for various states-of-nature as shown in the chart below. Which investment would you make under the different decision criteria?

States of Nature

Sever
Decline Moderate Decline Stable Moderate Advance Strong Advance
T-Bills 3.50 3.50 3.50 3.50 3.50
Paragon (22.50) (2.00) 20.00 35.00 50.00
Luster 28.00 14.70 0.00 (10.00) (20.00)
Apex 10.00 5.00 7.00 45.00 30.00
Market (13.00) 5.00 22.00 38.00 Portfolio 47.00

Probability 0.05 0.35 0.30 0.20 0.10

Note: For the following questions, ¡§Investment¡¨ is the name of the strategy not the number, i.e., Luster, Apex, etc.

a)Maximin criteria

Answer: Investment

b)Maximax criteria

Answer:Investment
c)Equally Likely criteria
Answer:Investment
d)Criterion of realism (assume Ą = 0.6)
Answer:Investment
e)Minimax regret criteria
Answer:Investment
f)Criterion of maximum expected value
Answer:Investment

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