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  • Decision Analysis: Alternatives Growing Stable Declining Bonds Stocks Mutual Funds

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    John Bert Luis
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    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.

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    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.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    34 views4 pages

    Decision Analysis: Alternatives Growing Stable Declining Bonds Stocks Mutual Funds

    Uploaded by

    John Bert Luis
    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.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    of 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

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