Question

Suppose that an investor is considering three alternative strategies: conservative, neutral, or aggressive. If economic conditions get better, then the strategies will return, respectively, 6%, 12%, and 20%. If economic conditions get worse, then the strategies will return, respectively, 4%, 2%, and -8%. If the coefficient of optimism is 80%, then using the Hurwicz criterion, the aggressive strategy would be evaluated based on its value of ...

Answer 1

Using the Hurwicz criterion with an 80% coefficient of optimism, the aggressive strategy would be evaluated by calculating a weighted value of 14.4%, which considers both the highest possible return and the potential loss.

Step-by-step explanation:

Using the Hurwicz criterion, an investor would evaluate different investment strategies based on a combination of the best-case and worst-case returns, weighted by the coefficient of optimism. In the case of the aggressive strategy, the best-case return is 20% and the worst-case return is -8%. With an 80% coefficient of optimism, the aggressive strategy's evaluation value can be calculated as:

(0.8 × 20%) + (0.2 × (-8%)) = 16% - 1.6% = 14.4%

This value of 14.4% represents the investor's weighted assessment of the aggressive investment's potential performance, given their level of optimism about the economic conditions improving.