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Jillian Smith has come into an inheritance from her grandparents. She is attempting to decide among...

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General Management

Jillian Smith has come into an inheritance from hergrandparents. She is attempting to decide among several investmentalternatives. The return after one year is dependent primarily onthe interest rate during the next year. The rate is currently 7%,and she anticipates it will stay the same or go up or down by atmost 2%. For the various investment alternatives, the returns (in$10000) for each interest rate that might be in effect are shown inthe following table.

Interest Rates

Investments

5%

6%

7%

8%

9%

MMFund

1.7

2.8

3

3.6

4.5

Stock Growth fund

-5

-3

3.5

5

7.5

Bond fund

5

4

3.5

3

2

Government fund

4

3.6

3.2

2.8

2.1

Risk fund

-12

-7

4.2

9.3

16.7

Savings bonds

3

3

3.2

3.4

3.5

Determine the best investment using thefollowing decision criteria (and here you want to maximizepayoff).

  • Maximax
  • Maximin
  • Minimax Regret
  • Equal Likelihood
  • Now assume Jillian, after doing some research,has been able to assign probabilities to each of the possibleinterest rates during the next year as follows:

  • Interest Rate

    5%

    6%

    7%

    8%

    9%

    Probability

    .1

    .2

    .4

    .2

    .1

    Using expected payoffs determine her best investmentdecision.

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