.   An investor is considering three alternatives-a certificate of deposit, a low risk stock fund, and a high risk stock fund- for a $20,000 investment. The investor considers three possible states of nature

          S₁: Strong stock market, S2: Moderate stock market, S3: Weak stock market

The payoff table (in dollars) is as follows:

Action	States of nature
Possible investment alternative	S1	S2	S3
Certificate of deposit	1,200	1,200	1,200
Low- risk stock	4,300	1,200	-600
High-risk stock fund	6,600	800	-1500

 

      (i) Which action is selected by the investor if he is a risk seeker?                    [2Marks]

       (ii)     Which action is selected by the investor if he is a risk averter?            [2Marks]

       (iii) Which criteria is selected by the minim ax regret criterion?                     [3Marks]

Answer rating: 100% (QA)

Solution Refer the given table for proper understanding Action States of nature Possible investment ... View the full answer