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PU Stock Mutual Fund and a One Year Certificate of Deposit Worksheet

PU Stock Mutual Fund and a One Year Certificate of Deposit Worksheet

Question Description

Please explain all answers!

1. One of Philip Mahn’s investments is going to mature, and he wants to determine how to invest the proceeds of $30,000. Philip is considering two new investments: a stock mutual fund and a one-year certificate of deposit (CD). The CD is guaranteed to pay an 8% return. Philip estimates the return of the stock mutual fund as 16%, 9%, or -2%, depending on whether the market conditions are good, average, and poor, respectively. Philip estimates the probability of a good, average, and poor market to be 0.1, 0.85, and 0.05, respectively.

A. construct a payoff matrix for this problem.

B. what decision should be made according to the maximum decision rule?

C. what decision should be made according to the maximin decision rule?

D. what decision should be made according to the minimax regret decision rule?

E. what decision should be made according to the EMV decision rule?

F. what decision should be made according to the EOL decision rule?

G. how much should Philip be willing to pay to obtain a market forecast that is 100% accurate.

2. From industry statistics, a credit card company knows that 0.8 of its potential card holders are good credit risks and 0.2 are bad credit risks. The company uses discriminant analysis to screen credit card applicants and determine which ones should receive credit cards. The company awards credit cards to 70% of those who apply. The company has found that of those awarded credit cards, 95% turn out to be good credit risks. What is the probability that an applicant who is a bad credit risk will be denied a credit card?

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