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What decision would maximize expected profits

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Hamad studied finance at Al Ain University last semester. He is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of the three investment alternatives he is considering:

STATE OF NATURE

Stock market 100,000 -30,000

Bonds 40,000 30,000

CDs 30,000 30,000

If the probability of a good economy is 50% answer the following:

Question (a) What decision would maximize expected profits?

Question (b) What is the maximum amount that should be paid for a perfect forecast of the economy?

Question (c) What decision would minimize the expected opportunity loss? What is the minimum EOL?

Reference no: EM132683242

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