Allen Young has always been pround of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however, Allen has become very concerned about the stock market as a good investment. In some cases, it would have been better for Allen to have his money in a bank than in the market. During the next year, Allen must decide whether to invest $10,000 in the stock market or in a certificate of deposit (CD) at an interest rate of 9%. If the market is good, Allen believe that he could get a 14% return on his money. With a fiar market, he expects to get an 8% return. If the market is bad, he will most likely get no return at all-in other words, the return would be 0%. Allen estimated that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long-run average return. a. Develop a decision table for this problem. b. What is the best decision? 3-22: Decision table Alternative Stock Market CD Probability Outcome ("State of Nature")
Allen Young has always been pround of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however, Allen has become very concerned about the stock market as a good investment. In some cases, it would have been better for Allen to have his money in a bank than in the market. During the next year, Allen must decide whether to invest $10,000 in the stock market or in a certificate of deposit (CD) at an interest rate of 9%. If the market is good, Allen believe that he could get a 14% return on his money. With a fiar market, he expects to get an 8% return. If the market is bad, he will most likely get no return at all-in other words, the return would be 0%. Allen estimated that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long-run average return. a. Develop a decision table for this problem. b. What is the best decision? 3-22: Decision table Alternative Stock Market CD Probability Outcome ("State of Nature")
Chapter11: Property Dispositions
Section: Chapter Questions
Problem 52P
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Transcribed Image Text:Allen Young has always been pround of his personal investment strategies and has done very well over the
past several years. He invests primarily in the stock market. Over the past several months, however, Allen
has become very concerned about the stock market as a good investment. In some cases, it would have
been better for Allen to have his money in a bank than in the market. During the next year, Allen must
decide whether to invest $10,000 in the stock market or in a certificate of deposit (CD) at an interest rate
of 9%. If the market is good, Allen believe that he could get a 14% return on his money. With a fiar market,
he expects to get an 8% return. If the market is bad, he will most likely get no return at all-in other words,
the return would be 0%. Allen estimated that the probability of a good market is 0.4, the probability of a fair
market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long-run average
return.
a. Develop a decision table for this problem.
b. What is the best decision?
3-22: Decision table
Alternative
Stock Market
CD
Probability
Outcome ("State of Nature")
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