An investor wishes to invest $10,000 in bonds and gold. He knows that the return on the
Question:
An investor wishes to invest $10,000 in bonds and gold. He knows that the return on the investments will be affected by changes in interest rates. After some analysis, he estimates that the return (in thousands of dollars) at the end of a year will be as indicated in the following payoff matrix:
(A) We assume that fate is a very clever player and will play to reduce the investor’s return as much as possible. Find optimal strategies for both the investor and for “fate.” What is the value of the game?
(B) Find the expected values of the game if the investor continues with his optimal strategy and fate “switches” to the following pure strategies:
(1) Play only 0% change;
(2) Play only +1% change;
(3) Play only -3% change.
Change in interest rates (fate) 0% 1 Bonds Gold -1 +1% -3%. - 1 6 2 -3
Step by Step Answer:
1 3 2 3 Step 1 Convert M into a positive matrix M by adding 4 to each entry in M 5 3 10 36 A Let M 1 M B Maximize subject to Step 2 Set up the two cor...View the full answer
Finite Mathematics For Business Economics Life Sciences And Social Sciences
ISBN: 9780134862620
14th Edition
Authors: Raymond Barnett, Michael Ziegler, Karl Byleen, Christopher Stocker
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