Consider an investor with $10,000 available to invest. He has the following options regarding the allocationof his available funds: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rateof return; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or10%; or (3) he can invest in a more risky stock, where the possible annual rates of return are 1%, 9%,or 17%. Note that the investor can place all of his available funds in any one of these options, or he can split his $10,000 into two $5000 investments in any two of these options. The joint probability distribution of the possible return rates for the two stocks is given
| Investment data |
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Risky stock return (R) |
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R=1% |
R=9% |
R=17% |
| Safe stock return (S) |
S=6% |
0.10 |
0.05 |
0.10 |
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S=8% |
0.25 |
0.05 |
0.20 |
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S=10% |
0.10 |
0.05 |
0.10 |
a.) just build the payoff matrix model in each caseb.)compute a regret (opportunity loss) matrix.HINT:Your payoff matrix should have six strategies and nine states of nature.