An investor has the opportunity to buy one of four different stocks. Each stock is currently selling for $50 per share, and the investor will purchase 20 shares of one of the stocks and sell them one year later. If there is a recession (state 1) the selling prices will be $40, $52, $58, and $45. If there is no recession, the selling prices will be $53, $56, $54, and $60. Complete the payoff table and opportunity loss table below.
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Payoff Table
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Alternatives
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State 1
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State 2
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Stock 1
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Stock 2
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Stock 3
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Stock 4
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Opportunity Loss Table
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Alternatives
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State 1
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State 2
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Stock 1
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Stock 2
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Stock 3
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Stock 4
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Given the information above,
- Are any of the stocks clearly inferior choices? (Explain. You can eliminate any inferior choice(s) from the rest of the analysis).
- What is the alternative chosen using the optimistic (maximax) criterion?
- What is the alternative chosen using the pessimistic (minimax) criterion?
- What is the alternative chosen using the minimax regret criterion?
- Over the past 40 years, the probability of any given year being a recessionary year is 0.1. Given this information,
- Calculate the expected monetary value (EMV) for each stock. Which stock would an EMV maximizer choose?
- Calculate the EVPI (that is, how much the investor should be willing to pay an economist (or a psychic) to tell him, with certainty, next yearAc€?cs state of nature).