Introduction to Management Science 12th Edition by Bernard Taylor

Exercise 18

In Problems 1 and 2, Ann Tyler is considering hiring a financial analyst to help her determine the best investment. What is the maximum amount she should pay an analyst
Problem 1
Ann Tyler has come into an inheritance from her grandparents. She is attempting to decide among several investment alternatives. The return after 1 year is primarily dependent on the interest rate during the next year. The rate is currently 7%, and Ann anticipates that it will stay the same or go up or down by at most two points. The various investment alternatives plus their returns ($10,000s), given the interest rate changes, are shown in the following table:
Determine the best investment, using the following decision criteria.
a. Maximax
b. Maximin
c. Equal likelihood
Problem 2
In Problem, Ann Tyler, with the help of a financial newsletter and some library research, has been able to assign probabilities to each of the possible interest rates during the next year, as follows:
Using expected value, determine her best investment decision.
Problem
Ann Tyler has come into an inheritance from her grandparents. She is attempting to decide among several investment alternatives. The return after 1 year is primarily dependent on the interest rate during the next year. The rate is currently 7%, and Ann anticipates that it will stay the same or go up or down by at most two points. The various investment alternatives plus their returns ($10,000s), given the interest rate changes, are shown in the following table:
Determine the best investment, using the following decision criteria.
a. Maximax
b. Maximin
c. Equal likelihood