Economics
Howard College Investment Alternatives Economic Probabilities Calculations

Howard College

### Question Description

I’m studying for my Economics class and don’t understand how to answer this. Can you help me study?

5-6 You are considering three investment alternatives for some spare cash: Old Reliable

Corporation stock (A1), Fly-By-Nite Air Cargo Company stock (A2), and a federally insured

savings certificate (A3). You expect the economy will either “boom” (N1) or “bust” (N2), and

you estimate that a boom is more likely (p1 = 0.6) than a bust (p2 = 0.4). Outcomes for

the three alternatives are expected to be (1) \$2,000 in boom or \$500 in bust for Old Reliable

Corporation; (2) \$6,000 in boom, but –\$5,000 (loss) in bust for Fly-By-Nite; and (3) \$1,200

THE QUESTION IS

5.7 If you have no idea of the economic probabilities pj in Question 5-6, what would be your

decision based on uncertainty using (a) maximax, (b) maximin, (c) equally likely, and (d)

minimax regret assumptions? DO THIS QUESTION IN EXCEL FILE and if there are some calculations please show me your math when I click on the cells

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Alternatives

N1:Boom
P1

N2:Bust
P2

0,6
0,4
A1(ORC)
\$2.000
\$500
A2(FBN)
\$6.000
(\$5.000)
A3(Cert)
\$1.200
\$1.200
Expected Values
Expected Value of A1
1400
Expected Value of A2
1600
Expected value of A3
1200
(a) Maximax Approach (choosing...

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University of Virginia
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