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Decision Problem: Chose the best alternative

ALLEN YOUNG HAS ALWAYS BEEN PROUD OF HIS PERSONAL INVESTMENT STRATEGIES AND HAS DONE VERY WELL OVER THE PAST SEVERAL YEARS. HE INVESTS PRIMARILY IN THE STOCK MARKET. OVER THE PAST SEVERAL MONTHS, HOWEVER ALLEN HAS NOT DONE WELL IN HIS INVESTMENTS. IN SOME CASES IT WOULD HAVE BEEN BETTER FOR ALLEN TO HAVE HIS MONEY IN THE BANK THAN IN THE MARKET. DURING THE NEXT YEAR, ALLEN MUST DECIDE WHETHER TO INVEST $10,000 IN THE STOCK MARKET OR CERTIFICATE OF DEPOSIT AT AN INTEREST RATE OF 9%. IF THE MARKET IS GOOD, ALLEN BELIEVES THAT HE COULD GET 14% RETURN ON HIS MONEY. WITH A FAIR MARKET, HE EXPECTS TO GET 8% RETURN, IF MARKET IS BAD, HE WILL MOST LIKELY TO GET NO RETURN AT ALL
-IN OTHER WORDS THE RETURN WOULD BE 0%. ALLEN ESTIMATES THAT HE PROBABILITY OF A GOOD MARKET IS 0.4, THE PROBABILITY OF FAIR MARKET IS 4.0, THE PROBABILITY OF A BAD MARKET IS 2.0, AND HE WISHES TO MAXIMIZE HIS LONG RUN AVERAGE RETURN.

1. DEVELOP A DECISION TABLE FOR THIS PROBLEM.
2. WHAT IS THE BEST DECISION.

Solution Summary

This posting contains solution to following problem on decision theory.

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