Managerial Economics Study Set 9
Quiz 15 :
Decisions Under Risk and Uncertainty
a) Under Maximax strategy, firm will operate plants in US, Mexico, Canada. b) Under Maximin rule, firm will operate plants in US only. c) Calculating the potential regret matrix as: The highlighted numbers represent the maximum potential regrets. Thus, the Minimax regret rule will be to either to operate in US and Mexico or operate in US, Mexico and Canada. d) First calculating the average payoffs as: So, as per the equal probability rule, the firm will operate in US, Mexico and Canada.
When a company's method of making decisions under risk is to make the best out of the worst situation, the rule that it needs to follow is the maximin rule which focusses on getting maximum output from minimum or worst situations. This rule helps in adopting different strategies so as to come out of an unfavorable situation to achieve the best possible results.
High returns can only be achieved when a person is taking high risk because there is a direct relation between risk and return in portfolio management. In the given question it is written that a portfolio manager needs to pick winners with high returns and low risk which is not at all possible, as one cannot get high returns without undertaking high risk.