One of Mary’s investments is going to mature, and she wants to determine how to invest the proceeds of $50,000. Mary is considering three new investments: a business startup fund (BSF), a one-year certificate of deposit (CD) with a guarantee of 4.5% return, or a communication technology stock called New 5 G Technology(N5G).
Mary estimates the return on BSF as 15%, 9%, -3% or -12%, and the return on N5G as 33%, 28%, -13% or -22%, depending on whether market conditions are excellent, good, average, or poor, respectively. Mary also has been collecting financial market information daily and estimates the probabilities of an excellent, good, average, and poor market to be 0.23, 0.20, 0.47, and 0.10, respectively.
(B-1) Construct a payoff matrix (in dollars) for this problem.
(B-2) What decision should be made according to Expected Value Approach?
(B-3) Create a regret table and explain what decision should be made according to Minimax Regret Approach.
(B-4) What is the EVPI?