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. For the combination of 'Bear' and 'Mixture',the opportunity loss is ______.
A)0
B)5
C)13
D)33
E)-10

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.  For the combination of 'Bear' and 'Mixture',the opportunity loss is ______.
A)0 
B)5 
C)13 
D)33 
E)-10

Quizplus · Accepted Answer

To find the opportunity loss, we need to find the maximum profit for each market condition and subtract it from the profit of the alternative we are evaluating.

For the combination of 'Bear' and 'Mixture', the maximum profit is $65,000. The profit associated with alternative 3 is $52,000. Therefore, the opportunity loss is $65,000 - $52,000 = $13,000.

To find the best choice, we can use different decision criteria, such as:
- Maximax: choose the alternative with the highest possible profit. In this case, alternative 1 has the highest possible profit of $95,000 when the market is 'Bull' and 'Boom'. Therefore, the best choice is alternative 1.
- Maximin: choose the alternative with the highest minimum profit. In this case, alternative 2 has the highest minimum profit of $35,000 when the market is 'Bear' and 'Boom'. Therefore, the best choice is alternative 2.
- Minimax regret: choose the alternative with the smallest maximum opportunity loss. In this case, we need to calculate the opportunity loss for each combination of market conditions and alternatives, and then find the maximum opportunity loss for each alternative. The maximum opportunity losses are: $15,000 for alternative 1, $25,000 for alternative 2, $13,000 for alternative 3, and $23,000 for alternative 4. Therefore, the best choice is alternative 3.

Other decision criteria could lead to different choices, but in general, it seems that alternative 3 is a reasonable choice as it has a relatively good performance across different market conditions (except for 'Boom' and 'Bust', where all alternatives have a low profit).

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