Allen Young has always been proud of his personal
investment strategies and has done very well over
the past several years. He invests primarily in the
stock market. Over the past several months, however,
Allen has become very concerned about the
stock market as a good investment. In some cases, it
would have been better for Allen to have his money
in a bank than in the market. During the next year,
Allen must decide whether to invest $10,000 in the
stock market or in a certificate of deposit (CD) at an
interest rate of 9%. If the market is good, Allen believes
that he could get a 14% return on his money.
With a fair market, he expects to get an 8% return.
If the market is bad, he will most likely get no return
at all—in other words, the return would be 0%.
Allen estimates that the probability of a good market
is 0.4, the probability of a fair market is 0.4, and the
probability of a bad market is 0.2, and he wishes to
maximize his long-run average return.
(a) Develop a decision table for this problem