Consider the following two investment decisions: buy a certified deposit (CD) which will pay you a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the following two investment decisions: buy a certified deposit (CD) which will pay you a 10% annual interest rate, and buy some stocks which will either give you a 30% annual return (with 0.7 probability) or incur a 10% loss for you (with 0.3 probability). In terms of expected utility, you should, of course, buy stocks. However, suppose you are conservative and cannot tolerate any loss of your principal. In this case, you have no choice but to deposit your money into a CD. Now consider this problem for a 3-year time span. You start with 1 unit of money. Each year you can choose only one way to invest your entire fund (meaning you are not allowed to diversify, like 50% CD, 50% stocks). You definitely don't want to lose any money at the end of the 3 years, but you are okay with a "temporary" loss during the time (for example, it is okay for you to lose some money in the first year as long as you can make it up later). Formalize this problem as a Markov decision process and compute its optimal policy. Consider the following two investment decisions: buy a certified deposit (CD) which will pay you a 10% annual interest rate, and buy some stocks which will either give you a 30% annual return (with 0.7 probability) or incur a 10% loss for you (with 0.3 probability). In terms of expected utility, you should, of course, buy stocks. However, suppose you are conservative and cannot tolerate any loss of your principal. In this case, you have no choice but to deposit your money into a CD. Now consider this problem for a 3-year time span. You start with 1 unit of money. Each year you can choose only one way to invest your entire fund (meaning you are not allowed to diversify, like 50% CD, 50% stocks). You definitely don't want to lose any money at the end of the 3 years, but you are okay with a "temporary" loss during the time (for example, it is okay for you to lose some money in the first year as long as you can make it up later). Formalize this problem as a Markov decision process and compute its optimal policy.
Expert Answer:
Answer rating: 100% (QA)
SOLUTION To formalize the problem as a Markov decision process MDP we need to define the states actions transition probabilities rewards and the goal States The state at any time during the 3year time ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
Students also viewed these finance questions
-
At $453 billion in 2005, Rock's assets under management had grown four times faster than Merrill's $544 billion mutual fund assets. During 2005, Rock's net income increased to $270 million, or 63...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
A pistoncylinder device contains superheated steam. During an actual adiabatic process, the entropy of the steam will (never, sometimes, always) increase.
-
Refer to the Bearskin Airlines company information in Exercise 3-17. Required: 1. Develop annual cost formulas for airplane depreciation, fuel, and airplane maintenance. 2. Using the three annual...
-
Arnold is the successful owner and operator of a small business. He plans to take a one-year vacation and is interviewing Minnie for the position of manager while he is away. On the basis of...
-
The Honeybee dataset contains data collected from the USDA on the estimated number of honeybee colonies (in thousands) for the years 1995 through 2012. We use technology to find that a regression...
-
The United Kingdom started regulating the size of grocery stores in the early 1990s, and today the average size of a typical U. K. grocery store is roughly half the size of a typical U. S. store and...
-
make a working plan about you for the next Five years including, but not - limiting the following paints. Your plan must include SWOT Analysis of you. [Google what is SWOT Analysis] How will you...
-
1. The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 16. The Gaytors paid tuition and fees for both Crocker and Cayman to attend...
-
The charge Q(t) on a capacitor in an LRC-circuit satisfies L- +R- + Q = V(t) dQ dQ 1 d1 dt where L = 0.5 H, R = 222, C = F. (a) If V (t) = sin(41) V and Q(0) = 0 = Q'(0), find Q(1). (b) Sketch the...
-
Why is the number of members so important in a capitated environment?
-
Define the term relevant range.
-
What is meant by the term cost?
-
Why is utilization management so important in a capitated environment?
-
Explain the features and provide examples of fixed and variable costs.
-
c) Your accountant gathered data on overhead costs and direct labour-hours over the past 12 months. Discuss the different approaches an accountant can use to estimate a cost function for overhead...
-
Dawson Companys balance sheet information at the end of 2019 and 2020 is as follows: Additional information: The company did not issue any common stock during 2020. Required : Next Level Fill in the...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1 and 2. On September 1, Irene opened a retail store that specializes in sports car...
-
Jenny earns $34,500 in 2012. Calculate the FICA tax that must be paid by: Jenny: ..............................Soc,Sec. ..................$______________...
-
David and Darlene Jasper have one child, Sam, who is 6 years old. The Jaspers reside at 4639 Honeysuckle Lane, Los Angeles, CA 90248. David's Social Security number is 577-11-3311, Darlene's is...
-
A typical timber wolf has a mass of \(40 \mathrm{~kg}\), a typical jackrabbit a mass of \(2.5 \mathrm{~kg}\). Given the scaling law presented in the passage, we'd expect the specific metabolic rate...
-
A standard gold bar stored at Fort Knox, Kentucky, is 7.00 inches long, 3.63 inches wide, and 1.75 inches tall. Gold has a density of \(19,300 \mathrm{~kg} / \mathrm{m}^{3}\). What is the mass of...
-
A typical timber wolf has a mass of \(40 \mathrm{~kg}\), a typical jackrabbit a mass of \(2.5 \mathrm{~kg}\). Given the scaling law presented in the passage, we'd expect the wolf to use times more...
Study smarter with the SolutionInn App