An investor must decide whether to invest in a risky single hedge fund or not. If...

 

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An investor must decide whether to invest in a risky single hedge fund or not. If he invests and there is no turbulence on the capital market, he can have a benefit of 600 Euros. Should there be turbulence, he would lose his input money (investment) of 1000 Euros. Alternatively, he can also invest the money securely, in which case he has a guaranteed interest of 200 Euros over the same period of time. The investor asks a friend of him, an economic expert to help him make a decision, whether turbulence is to be expected or not. He knows that the expert's estimations are correct in 80% of the cases. a) For the above situation, what do the elements of the statistical decision problem (O, X, D, L) look like? b) Compute the risk function for the decision rule 'Buy single hedge fund when the expert predicts no turbulence', where you firstly formalize the & decision rule and then compute the risk function. c) What happens to the risk function from b), if the expert's estimation is correct in 50% of the cases? An investor must decide whether to invest in a risky single hedge fund or not. If he invests and there is no turbulence on the capital market, he can have a benefit of 600 Euros. Should there be turbulence, he would lose his input money (investment) of 1000 Euros. Alternatively, he can also invest the money securely, in which case he has a guaranteed interest of 200 Euros over the same period of time. The investor asks a friend of him, an economic expert to help him make a decision, whether turbulence is to be expected or not. He knows that the expert's estimations are correct in 80% of the cases. a) For the above situation, what do the elements of the statistical decision problem (O, X, D, L) look like? b) Compute the risk function for the decision rule 'Buy single hedge fund when the expert predicts no turbulence', where you firstly formalize the & decision rule and then compute the risk function. c) What happens to the risk function from b), if the expert's estimation is correct in 50% of the cases?

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A The elements of the statistical decision problem for this situation are as follows X Turbulence on ... View the full answer