Problem 320: Investment Strategy for Mickey Lawson

1
Problem 3-20 Investment Strategy for Mickey
Lawson

• November 2006

2
The Problem

• Based on information from Problem 3-19, develop
  an opportunity loss table for the investments
  Mickey is considering Stock Market, Bonds, or
  Certificates of Deposit (CDs).
• What decision would minimize the expected
  opportunity loss?
• What is the minimum Expected Opportunity Loss
  (EOL)?

3
Decision Model

• Decision is being made under risk.
• Probabilities are known.
• The Decision Model will be the minimization
  (Minimax) of expected opportunity loss.

4
Data Used for the Decision
5
Calculations for Each Option under two States of
Nature

6
Total Expected Opportunity Loss
7
Smallest Expected Opportunity Loss Based on
Probability for Each State of Nature

• Stock Market 43,000 x 0.5 21,500
• Bonds 50,000 x 0.5 25,000
• CDs 57,000 x 0.5 28,500
• Given the information above, Mickeys best
  decision would be to invest his funds in the
  stock market.