Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. If Ray uses the Hurwicz criterion with alpha = 0.5,the appropriate choice is ______.
A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)None

Question

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions.  If Ray uses the Hurwicz criterion with alpha = 0.5,the appropriate choice is ______.
A)T-Bills 
B)Stocks 
C)Bonds 
D)Mixture 
E)None

Quizplus · Accepted Answer

Using the Hurwicz criterion with alpha=0.5, we calculate the expected payoff for each alternative by taking the weighted average of the best and worst possible profits:

For T-Bills: 
(0.5)(2) + (0.5)(2) = 2

For Stocks: 
(0.5)(10) + (0.5)(-6) = 2

For Bonds: 
(0.5)(6) + (0.5)(3) = 4.5

For Mixture: 
(0.5)(8) + (0.5)(-4) = 2

The alternative with the highest expected payoff is Bonds, with an expected profit of $45,000. Therefore, the best choice is C (Bonds).

Ray Crofford Is Evaluating Investment Alternatives to Invest $100,000 Which