1. A decision tree has action a1 with outcomes s1, s2 and s3 with payoffs K8000, K10000 and -K1000

Decision a2 with outcomes s1, s2 and s3 with payoffs K3000, K6000 and -K2000

Decision a3 with outcomes s1, s2 and s3 with outcomes K10 000, -K900 and K50

Find the actions that would be prescribed by the maximax, and maximin criterion.

Explain why the action prescribed by the Maximin criterion here is potentially unreasonable from a practical viewpoint.

2.

1. An investment manager has a dilemma of how to invest K10 000 000. He could either invest in stocks, bonds, certificates of deposit (CD) or a mixture of the three. The economy could be stagnant 25%, slow growth 45% and rapid growth 30%.

For the stagnant economy K500 000, -K100 000, K300 000 and K200 000 would be the payoffs for the different investments

For the slow growth economy K700 000, K600 000, K500 000 and K650 000 would be the payoffs for the different investments

For the rapid growth economy K2200 000, K900 000, K750 000 and K1300 000 would be the payoffs for the different investments.

Compute the expected monetary value (EMV).

3. A landlord can either lease for one or two years or sell offices outrightly for K100 Million with payoffs as follows:

Lease -100 50 150

Sell 100 100 100

The probability of rejecting is 30%, leasing for one year is 50% and for two years 20%. What is the optimal decision strategy if perfect information were available?

What is the expected value of perfect information?