Recommendations for Sue Pansky

Recommendations for Sue Pansky

The investment dilemma Sue Pansky faces is quite interesting, as she is a retiree and prefers to avoid situations that could produce high loss results. With this in mind, Sue must make a decision under uncertainty. Before Sue can determine whether or not to move forward with investing in Starting Right Corporation, certain criteria needs to be analyzed. To begin with, there are two states of nature, that of a favorable market (State 1), and that of an unfavorable market (State 2). There are also four alternatives Sue can choose between, and those include: to do nothing (Alternative 1), invest in corporate bonds (Alternative 2), invest in preferred stock (Alternative 3), and to invest in common stock (Alternative 4). The given data is evaluated with 0.5 probability of market behavior, and an initial investment of $30,000. The data is represented in Table 1.1.

Table 1.1

Decision Table for Sue Pansky

State of Nature

State 1

($) State 2

($) EMV Row Min. Row Max. Hurwiczb

Probabilities 0.5 0.5

Alternative 1 0 0 0 0 0 0

Alternative 2 50,552 a -10,000 20,276 -10,000 50,552 -917.2

Alternative 3 150,000 -15,000 67,500 -15,000 150,000 9,750.0

Alternative 4 240,000 -30,000 105,000 -30,000 240,000 105,000.0

maximum 105,000 0 240,000 105,000.0

Best EV maximin maximax Best

Note. a Indicates value has been rounded to the nearest whole dollar.

b α = 0.15. The Hurwicz criterion represents Sue Pansky’s conservative nature with investing, and this criterion is later utilized in the case study.

Based on the provided data and calculations, choosing not to invest in Starting Right Corporation would appear to be the safest alternative. However, Sue Pansky, who prefers to avoid situations with high loss possibilities, does have an interest in investing in this new business venture (Render, Stair,