Mr. Merrill Lynch is planning on investing in stocks. He is considering three different types of stocks, ABC, DEF, and XYZ to choose from under two possible states, good and bad.
As a result of favorable stock market conditions, there is a 0.75 probability of good and 0.25 probability of bad state. The table below indicates the profits and losses of investing in the following three stocks under the given states — good and bad.
|Stock||Good State||Bad State|
Using Excel, set up a spreadsheet to find the best decision using:
c. Equal likelihood
d. Expected value