Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
563 views2 pages

Starting Right Case Ans

The document presents a payoff table and analysis for advising individuals on an investment strategy based on their risk tolerance. It analyzes four investment alternatives - doing nothing, corporate bonds, preferred stock, and common stock - across two market scenarios. It then makes recommendations for each of six individuals based on their risk profiles and the criteria of minimizing loss, expected value, or maximum gain. Sue should do nothing to avoid any loss. Ray should also do nothing based on a modified expected value analysis. Lila should invest in corporate bonds to minimize loss. George should invest in common stock as it has the highest expected value. Pete should invest in common stock to maximize gain. Julia should offer doing nothing, bonds, or common stock to suit

Uploaded by

Saiyed Anver Akhtar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
563 views2 pages

Starting Right Case Ans

The document presents a payoff table and analysis for advising individuals on an investment strategy based on their risk tolerance. It analyzes four investment alternatives - doing nothing, corporate bonds, preferred stock, and common stock - across two market scenarios. It then makes recommendations for each of six individuals based on their risk profiles and the criteria of minimizing loss, expected value, or maximum gain. Sue should do nothing to avoid any loss. Ray should also do nothing based on a modified expected value analysis. Lila should invest in corporate bonds to minimize loss. George should invest in common stock as it has the highest expected value. Pete should invest in common stock to maximize gain. Julia should offer doing nothing, bonds, or common stock to suit

Uploaded by

Saiyed Anver Akhtar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Starting Right Case

Since there are no probabilities given in the case, each of the individuals mentioned in the case
must make a decision uncertainty.
In order to advise the individuals in the case on the investment strategy based on their risk
appetite and return expectations, a payoff table must be constructed. The two states in the case
are: a favorable market (event 1) and an unfavorable market (event 2). The four decision
alternatives are: do nothing (alternative 1), invest in corporate bonds (alternative 2), invest in
preferred stock (alternative 3), and invest in common stock (alternative 4). Given Below is the
payoff table .
Calculations for alternatives 2 ,3 and 4 are provided as follows:
Alternative 2: the return in a good market is $30,000 (1 + 0.13) 5 = $55,273. The return in a good
market is $120,000, (4 x $30,000) for alternative 3, and $240,000, (8 x $30,000) for alternative 4.
Payoff table
Laplace

Hurwicz

Event 1

Event 2

Average Value

Minimu
m

Maximu
m

Value

Alternative
1

0.0

0.00

Alternative
2

55,273

10,000

22,636.5

10,000

55,273

2,819.97

Alternative
3

120,00
0

15,000

52,500.0

15,000

120,000

150.00

Alternative
4

240,00
0

30,000

105,000.0

30,000

240,000

300.00

Regret table
Maximum
Alternative

Event 1

Event 2

Regret

Alternative 1

240,000

240,000

Alternative 2

184,727

10,000

184,727

Alternative 3

120,000

15,000

120,000

Alternative 4

30,000

30,000

a. Sue Pansky is a risk avoider and should choose an alternative that has no loss. Since all
the decision alternatives involve a chance of loss,she should do nothing and not make an

investment in Starting Right.


b. Ray Cahn should use the Hurwicz value in his deciion, with a coefficient of realism of
0.11, since he believes there is only a 11% chance of The best decision is to do nothing.
c. Lila Battle should eliminate alternative 1 of doing nothing and apply the maximin
criterion. The result is to invest in the corporate bonds.
d. George Yates should use the Laplace decision criterion. He would choose the highest
value calculated in the Laplace column. Therefore, the best decision for George is to invest in
common stock.
e. Pete Metarko is a risk taker, and is optimistic about the market he should choose to invest
in common stock. This is because it is the alternative ith the highest maximun return.
f. Julia Day can eliminate the preferred stock alternative and still offer alternatives to risk
seekers (common stock) and risk avoiders (doing nothing or investing in corporate bonds).

You might also like