Additional

Problem for Session 2

On a particular Monday, you have been given Rs.12,000 and have been asked to spend the whole
amount to buy shares in the market on Tuesday morning. Your options are to spend the whole amount
to buy shares of Company A, or to spend the whole amount to buy shares of Company B, or to spend
equal amounts to buy shares of both companies. Shares of Company A can be bought on Tuesday
morning at Rs.60 per share, and shares of Company B at Rs.20 per share. You will have to sell all your
shares on Wednesday evening, just before closing time. Your payoff is the profit/loss you make with
your investment.
At closing time on Tuesday, the price of Company As shares have a 60% chance of increasing by 20%
over their price at the time you buy the shares, and a 40% chance of decreasing by 40%. At the time
when you sell your stock, the prices of Company As shares have a 30% chance of increasing by 20% over
their price at starting time on Wednesday, and a 70% chance of decreasing by 40%.
At closing time on Tuesday, the price of Company Bs shares have a 30% chance of increasing by 50%
over their price at the time you buy the shares, and a 70% chance of remaining unchanged. At the time
when you sell your stock, the prices of Company Bs shares have a 50% chance of decreasing by 10%
over their price at starting time on Wednesday, and a 50% chance of decreasing by 40%.
The prices of both stocks at opening time on Wednesday are the same as their respective prices at
closing time on Tuesday. The share prices of the two companies vary independently of each other.
a.
b.
c.
d.
e.

Write down the payoff table for this problem.

What will your decision be if you use the maximax approach for decision making?
What will be your decision if you use the maximin approach for decision making?
What will your decision be if you use the min-max regret criterion?
What will your decision be if you adopt the maximum expected value criterion for your decision
making?