A Group of Friends Are Planning a Recreational Outing and Have

question 32

Essay

A group of friends are planning a recreational outing and have constructed the following payoff table to help them decide which activity to engage in. Assume that the payoffs represent their level of enjoyment for each activity under the various weather conditions.
$\begin{array}{lcccc}&&&\text { Weather }\\&&Cold &Warm& Rainy\\&&\mathrm{S} & \mathrm{S}_{2} & \mathrm{~S}_{3}\\\text { Bike: } & \text { Al } & 10 & 8 & 6 \\\text { Hike: } & \text { A2 } & 14 & 15 & 2 \\\text { Fish: } & \text { A3 } & 7 & 8 & 9\end{array}$
-If the probabilities of cold weather (S1), warm weather (S2), and rainy weather (S3) are 0.2, 0.4, and 0.4, respectively, then what decision should be made using the expected value criterion?

---

Definitions:

Risk-Free Rate

An ideal rate of return on an investment with no risk, typically represented by government bond yields.

Market Risk Premium

The increased return an investor hopes to gain by investing in a risky market portfolio rather than in assets free of risk.

Required Return

The minimum rate of return on an investment necessary to compensate the investor for the level of risk assumed.

Overall Return

The total gain or loss experienced on an investment over a given period, taking into account capital gains, dividends, and interest.