Decision Making II

Quiz 1
Maximum time allowed 45 minutes
Problem: [27+2+2+7+7 = 45 points]
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) Fill out the entries in the payoff table for this problem.
(b) What will your decision be if you used the maximax approach for decision making? What is the
maximax payoff?
(c) What will be your decision if you used the maximin approach for decision making? What is the
maximin payoff?
(d) What is the maximum regret associated with each of your three decision options? What will
your decision be if you used the min-max regret criterion?
(e) What is the expected payoff associated with your three decision options? What would your
decision be if you adopted the maximum expected value criterion for your decision making?

Name: ______________________________________________________________

Roll No. ___________________

Section: ______

We expect your answers to be correct up to at least two places after the decimal point.
Please write in blue or black ink only.
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(a) Payoff table (Note that you need to fill out the values of A and B in each of the columns)
Share Prices

100
B: 100
00
00
00
00
A:

Decision
Buy A
Buy B
Buy both
Probabilities

100
B: 100
A:

100
B: 100
A:

100
B: 100

A:

100
B: 100
A:

100
B: 100
A:

100
B: 100
A:

100
B: 100

A:

100
B: 100
A:

(b) The decision is ________________________________________________________________________________________________

The maximax payoff is Rs.___________________________
(c) The decision is ________________________________________________________________________________________________
The maximin payoff is Rs.___________________________

(d) The maximum regret associated with

Spending the whole amount on shares of company A is _________________________

Spending the whole amount on shares of company B is _________________________

Spending equal amounts on shares of both companies is _________________________

The decision is ________________________________________________________________________________________________
(e) The expected payoff associated with
Spending the whole amount on shares of company A is _________________________

Spending the whole amount on shares of company B is _________________________

Spending equal amounts on shares of both companies is _________________________

The decision is ________________________________________________________________________________________________