An investor is considering 4 investments, A, B, C and leaving his money in the b

Question

An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. A B C D E F G H 1 Payoff Matrix Regret Matrix 2 3 Economy Economy 4 Investment Decline Expand Investment Decline Expand 5 A 0 85 A 6 B 25 65 B 7 C 40 30 C 8 Bank 10 10 Bank ____ 11. Refer to Scenario 15-2. What formula should go in cell F5 of the Regret Matrix to compute the regret value? a. =B$5-MAX(B$5:B$8) b. =MAX(B$5:B$8)-MAX(B5) c. =MAX(B$5:B$8)-MIN(B$5:B$8) d. =MAX(B$5:B$8)-B5

Explanation / Answer

An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%. A B C D 1 Payoff Matrix 2 3 Economy 4 Investment Decline Expand EMV 5 A -10 90 6 B 20 50 7 C 40 45 8 Bank 15 20 9 10 Probability 0.7 0.3 Payoffs

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