Use the following to answer the question(s) below.
As a result of the financial crisis in the fall of 2008, when the government intervened to help the economy, an investor was considering various strategies for her money and the estimated profits would depend on how successful the intervention would be in helping the economy. The estimated annual return for two different investment strategies are shown in the following table.
-Using the maximax approach, the investor should
A) choose 20% stocks 80% bonds.
B) choose 80% stocks 20% bonds.
C) choose 20% stocks 80% bonds if the economy rebounds.
D) choose 80% stocks 20% bonds if the economy declines.
E) choose 20% stocks 80% bonds if there is no change.

Question

Use the following to answer the question(s) below.
As a result of the financial crisis in the fall of 2008, when the government intervened to help the economy, an investor was considering various strategies for her money and the estimated profits would depend on how successful the intervention would be in helping the economy. The estimated annual return for two different investment strategies are shown in the following table. 
-Using the maximax approach, the investor should
A) choose 20% stocks 80% bonds. 
B) choose 80% stocks 20% bonds. 
C) choose 20% stocks 80% bonds if the economy rebounds. 
D) choose 80% stocks 20% bonds if the economy declines. 
E) choose 20% stocks 80% bonds if there is no change.

Quizplus · Accepted Answer

The maximax approach recommends choosing the option with the highest possible return in the best-case scenario. In this case, the best-case scenario is when the economy rebounds, which would result in a 15% return for stocks and a 10% return for bonds. The highest possible return is therefore 80% stocks and 20% bonds, which would result in an estimated annual return of 12.2% if the economy rebounds. Therefore, the investor should choose option B.

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