Which investment should Warren make under each of the following criteria? (a) Maximax criterion. (b) Maximin criterion. (c) Minimax regret criterion.

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Q3. Warren Buffy is an enormously wealthy investor who has built his fortune through
his legendary investing acumen. He currently has been offered three major investments
and he would like to choose one. The first one is a conservative investment that would
perform very well in an improving economy and only suffer a small loss in a worsening
economy. The second is a speculative investment that would perform extremely well in
an improving economy but would do very badly in a worsening economy. The third is a
countercyclical investment that would lose some money in an improving economy but
would perform well in a worsening economy.
Warren believes that there are three possible scenarios over the lives of these potential
investments: (1) an improving economy, (2) a stable economy, and (3) a worsening
economy. He also estimates that his profits under these respective scenarios are those
given by the following table:
Conservative
investment
Speculative investment
Countercyclical
investment
Improving
economy
$30 million
40 million
-10 million
Stable
economy
$5
million
10
million
0
Worsening
economy
$-10
million
-30 million
15 million
Which investment should Warren make under each of the following criteria?
(a) Maximax criterion. (b) Maximin criterion. (c) Minimax regret criterion.
Transcribed Image Text:Q3. Warren Buffy is an enormously wealthy investor who has built his fortune through his legendary investing acumen. He currently has been offered three major investments and he would like to choose one. The first one is a conservative investment that would perform very well in an improving economy and only suffer a small loss in a worsening economy. The second is a speculative investment that would perform extremely well in an improving economy but would do very badly in a worsening economy. The third is a countercyclical investment that would lose some money in an improving economy but would perform well in a worsening economy. Warren believes that there are three possible scenarios over the lives of these potential investments: (1) an improving economy, (2) a stable economy, and (3) a worsening economy. He also estimates that his profits under these respective scenarios are those given by the following table: Conservative investment Speculative investment Countercyclical investment Improving economy $30 million 40 million -10 million Stable economy $5 million 10 million 0 Worsening economy $-10 million -30 million 15 million Which investment should Warren make under each of the following criteria? (a) Maximax criterion. (b) Maximin criterion. (c) Minimax regret criterion.
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