Business Statistics: Introduction to decision analysis question Nancy invests pr

Question

Business Statistics: Introduction to decision analysis question

Nancy invests primarily in the stock market. Over the past several months, however, Nancy has bcome very concerned about the stock market as a good invwesment. In some cases it would have been better for Nancy to have her money in a bank in the market. During the next year, Nancy must decide whether to invest $10,000 in the stock market or in a certificate of dopesit (CD) at an interest rate of 90%. If the market is good, she believes that she could get a 14% return on his money. With a fair market, she sxpects to get an 8% return. If the market is bad, she will most likely get no return at all-in other words , the return would be 0%. Nancy estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the the probability of a bad market is 0.2.

a. Develop a decision table foe this probelm?

b. Develop the opportunity loss table?

c. What is the minimax (regret) decision?

d. Find the EVPI and interpret the result?

Explanation / Answer

Ans:

EVM(Stocks)=10000*0.14*0.4+10000*0.08*0.4+10000*0*0.2=880

EVM(CD)=0.09*10000=900

Best expected EVM=900=Expected value without perfect information

Expected value with perfect information=10000*0.14*0.4+10000*0.09*0.4+10000*0.2*0.09=1100

EVPI=1100-900=200

Maximax approach

Best return is 14% from stocks

Minimax approach

Best return is from CD i.e 9%

Minimax regret approch

Regret =opportunity loss

Now,maximum opportunity loss in stocks is of 9%

maximum opportunity loss in CD is of 5%

So,minimum opportunity loss is by investing in CD,So nancy should invest in CD.

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