Reference no: EM132861394
Jennifer just sold a piece of her property and received $220,000. She decided to put this amount of money into only one of these three possible investment options: The first option is a savings account at the local Metro Bank. This savings account has a 2.5% return rate regardless the condition of the future economy. The second option is a technology stock with a return rate of 9%, 7%, or -18%, depending on whether the future economy condition is good, average, or poor, respectively. The third option is a mutual fund with a return rate of 5%, 2%, or 1%, depending on whether the future economy condition is good, average, or poor, respectively. A business analyst at a well-respected business journal estimates the probability of a good, average, or poor future economy to be 25%, 35%, and 40%, respectively.
(Question 1) Construct a payoff table (in dollars) for Jennifer.
(Question 2) Explain which investment option Jennifer should select according to the optimistic approach.
(Question 3) Create regret table for Jennifer.
(Question 4) Explain which investment option Jennifer should select according to the minimax approach.
(Question 5) Explain which investment option Jennifer should select according to the expected value approach.
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