One of Tom's investments is going to mature, and he wants to determine how to invest the proceeds of $25,000. Tom is considering three new investments: a stock mutual fund (SMF), a one-year certificate of deposite (CD), or a nano-technology stock called (NNS). The CD is guaranteed to pay an 8% return. Tom estimates the return on the stock mutual fund (SMF) as 16%, 7%, or -9%, and the return on the nano-technology stock (NNS) as 30%, 5%, or -25%, depending on whether market conditions are good, average, or poor, respectively. Tom also has been collecting financial market information daily and estimates the probabilities of a good, average, and poor market to be 0.25, 0.45, and 0.30, respectively.
What decision should be made according to Minimax Regret Approach?
What decision should be made according to Expected Value Approach?
What is the EVPI?
If Larry adjusted his market estimations and assumes the probabilities of a good, average, and poor market to be 0.25, p, and 0.75-p, respectively. Report the probability range for p when the stock mutual fund (SMF) should be the selected decision. Also, report the probability range for p when the one-year CD should be the selected decision.
See the attached file.
Probability CD SMF NNS
Good 0.25 8% 16% 30%
Avg p 8% 7% ...
The solution discusses management decisions according to maximax regret approach and expected value approach.