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
To determine which investment to make under different decision criteria, we need to analyze the payoffs for each investment strategy and states of nature provided in the chart.
a) Maximin Criteria: Under this criteria, we calculate the minimum payoff for each investment strategy and choose the one with the highest minimum payoff. In this case, we compare the minimum payoffs for each investment strategy and select the maximum value.
b) Maximax Criteria: Under this criteria, we calculate the maximum payoff for each investment strategy and choose the one with the highest maximum payoff. In this case, we compare the maximum payoffs for each investment strategy and select the maximum value.
c) Equally Likely Criteria: Under this criteria, we assign equal probabilities to each state of nature and calculate the average payoff for each investment strategy. We choose the investment strategy with the highest average payoff.
d) Criterion of Realism: Assuming a risk tolerance of 0.6 (Ą = 0.6), we calculate the expected value (weighted average) for each investment strategy using the probabilities provided. We choose the investment strategy with the highest expected value.
e) Minimax Regret Criteria: Under this criteria, we calculate the regret for each investment strategy by finding the difference between each payoff and the maximum payoff in each state of nature. We then choose the investment strategy with the least maximum regret.
f) Criterion of Maximum Expected Value: We calculate the expected value (weighted average) for each investment strategy using the probabilities provided. We choose the investment strategy with the highest expected value.
Based on the information provided, the specific investment strategy (not mentioned in the question) should be selected for each decision criteria, which is not possible to determine without additional information.