Scribd
Upload
94 views

Decision Analysis: Alternatives Growing Stable Declining Bonds Stocks Mutual Funds

This document outlines different decision analysis approaches - maximax, maximin, and minimax regret - and applies them to choosing between bonds, stocks, and mutual funds given potential payoffs in growing, stable, or declining market conditions. The maximax approach chooses stocks, while the maximin approach chooses bonds since it has the highest minimum payoff. The minimax regret approach chooses mutual funds since it has the lowest maximum regret. Expected monetary value analysis also chooses bonds as it has the highest EMV of 32. The document calculates the expected value of perfect information as 6.

Uploaded by

John Bert Luis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
94 views

Decision Analysis: Alternatives Growing Stable Declining Bonds Stocks Mutual Funds

This document outlines different decision analysis approaches - maximax, maximin, and minimax regret - and applies them to choosing between bonds, stocks, and mutual funds given potential payoffs in growing, stable, or declining market conditions. The maximax approach chooses stocks, while the maximin approach chooses bonds since it has the highest minimum payoff. The minimax regret approach chooses mutual funds since it has the lowest maximum regret. Expected monetary value analysis also chooses bonds as it has the highest EMV of 32. The document calculates the expected value of perfect information as 6.

Uploaded by

John Bert Luis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Decision analysis

Maximax Approach (Optimistic)


Maximizes the maximum payoffs (Best of the Best)
Alternatives Growing Stable Declining
Bonds 40 45 5
Stocks 70 30 -13
Mutual Funds 53 45 -5
Decision: Invest to Stocks

Maximin Approach
Maximizes the minimum payoffs (Best of the worst)
Alternatives Growing Stable Declining
Bonds 40 45 5
Stocks 70 30 -13
Mutual Funds 53 45 -5
Decision: Invest to Bonds

Minimax Regret Approach


Maximizes the maximum Regret (Best of the worst)
Alternatives Growing Stable Declining
Bonds 40 45 5
Stocks 70 30 -13
Mutual Funds 53 45 -5

Regret table
Alternatives Growing Stable Declining
Bonds 30 0 0
Stocks 0 15 18
Mutual Funds 17 0 10
Decision: Invest in Mutual Funds
lysis
Optimistic)
s (Best of the Best)
Best
45
70
53

ach
s (Best of the worst)
Worst
5
-13
-5

proach
(Best of the worst)

Regret= best payoff- payoff received

Maximum Regret
30
18
17
Payoff Table

Alternatives Growing Stable Declining EMV


Bonds 40 45 5 32
Stocks 70 30 -13 25.1
Mutual Funds 53 45 -5 31.6
Probability 0.2 0.5 0.3
Decision: Invest in Bonds
EVPI = EVwPI- EVwoPI
EVwPI= 70(0.2)+ 45(0.5)+ 5(0.3)= 38
EVPI = 38-32
EVPI= 6

You might also like