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Question - Debbie Gibson is considering three investment options for a small inheritance that she has just received. - stocks, bond, and money market. The return on her investment will depend on the performance of the economy, which can be strong, average or weak. The returns for each possible combination are shown in the following table:
Investment
Strong
Average
Weak
Stocks
12%
6%
-10%
Bonds
7%
4%
1%
Money market
3%
2%
Assume that Debbie will choose only one of the investment options.
(a) Which investment should Debbie choose if she uses the maximax criterion?
(b) Which investment should Debbie choose if she uses the maximin criterion?
(c) Which investment should Debbie choose if she uses the equally likely criterion?
(d) Which investment should Debbie choose if she uses the criterion of realism with OL = 0,5?
(e) Which investment should Debbie choose if she uses the minimax regret criterion?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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