You are considering three investment alternatives for some spare cash: Old
Reliable Corporation stock (A1), Fly-By-Nite Air Cargo Company stock (A2), and a
federally insured savings certificate (A3). You expect the economy will either
“boom” (N1) or “bust” (N2), and you estimate that a boom is more likely (p1=0.6)
than a bust (p2=0.4). Outcomes for the three alternatives are expected to be (1)
$2,000 in boom or $500 in bust for ORC; (2) $6,000 in boom but $-5,000 (loss) in
bust for FBN; and (3) $1,200 for the certificate in either case. Set up a payoff table
(decision matrix) for this problem and show which alternative maximizes expected
value.
