Bruce Lee has some money to invest and he can buy a GIC, RIM shares or Gold. The one year payoff depends on the state of the economy. For example, if Bruce bought gold and recession hits, then Bruce will end up with $1000.
Probability State of economy GIC RIM Gold
0.3 Recession 1100 1000 1000
0.2 No growth 1100 2100 300
0.5 Normal growth 1100 500 1400
(a) How much would Bruce be willing to pay for a crystal that can tell him which state will turn up?
(b) Suppose the probability for no growth is 0.2 but the other probabilities are unknown. What is the range of the probability of "Normal Growth" for which it is best for Bruce to buy GIC?
(c) Consider the original problem but suppose the GIC is not available. Which investment should Bruce make?
What is the range of the payoff for RIM in Recession for which Bruce will still stay with your recommended investment?