An investor has a certain amount of money available to investnow. Three alternative investments are available. The estimatedprofits ($) of each investment under each economic condition areindicated in the following payoff table:
INVESTMENT SELECTION
EVENT A B C
Economy declines 500 -2000 -7000
No change 1000 2000 -1000
Economy expands 2000 5000 20000
Based on his own past experience, the investor assigns thefollowing probabilities to each economic condition:
P (Economy declines) = 0.30
P (No change) = 0.50
P (Economy expands) = 0.20
a. determine the optimal action based on the maximaxcriterion.
b. determine the optimal action based on the maximincriterion.
c.compute the the expected monetary value for eachinvestment
d. compute the expected opportunity loss for each investment
e. based on (c) or (d) which investment would you choose, andwhy?
