Table 9.4 represents the potential growth rates associated with 3 possible inves
ID: 3225552 • Letter: T
Question
Table 9.4 represents the potential growth rates associated with 3 possible investments: invest in bonds, stocks, or deposits. (a) what decision would you make if you were optimistic and applied the m criterion? (b) What decision would you make if you were pessimistic and applied the maximin criterion? (e) Which method would you use if you were not neither optimistic nor too pessimistic? Apply this method to this problem with a coefficient of optimism alpha = 0.7. The decision maker in X9.7 decides to repeat the calculation but this time the decision making criteria will be dependent upon minimizing regrets. What would the decision maker decide? From your answers to X9.7 and X9.8 comment on which investment opportunity the decision maker should make.Explanation / Answer
Question X9.9: Answer:
The investment opportunity of the decision maker depends on his view of the growth of the economy and the level of his acceptability of the risk. So, the decision about the choice of the investment differs from person to person based on the mind set of such persons.
If the decision maker is optimist, that is, when he is confident about the growth, then he will be certainly interested in investing in bonds as its expected growth rate is higher than those of stocks and bonds in case of growth of the economy. Also, if he has sufficient funds, he may give second preference to invest in stocks if he does not want to invest entirely in bonds.
If he is a pessimist, that is, when he expects that there will be fall in growth rate, then he will be certainly choosing deposits as it is the only safe side because other alternatives - bonds and stocks are expected to give negative returns, which is loss to the investor in case of fall in growth rates.
If he is neither optimist nor pessimist and neutral about the growth of the economy, he can choose to invest in deposits as it has more expected return in cas of no growth in the economy or he may choose to divesify his investment into any of the three alternatives, that is, investing in 2 or 3 opportunities/alternatives. He may invest in deposits first and then think of investing in both bonds and stocks or any one of them.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.