The management of Minuscule Investments Ltd. is considering two investment proposals, X and Y, either of which may be had for $10 million. Because of a limited capital budget, only one of the two can be selected. Their one-period payoffs are, respectively,
|
Investment X |
Investment Y |
||||
|
Payoffs |
$15 |
$25 |
$18 |
$20 |
$22 |
|
Probability |
½ |
½ |
1/3 |
1/3 |
1/3 |
Which set of payoffs is preferable and why? (Hint: Consider second-degree stochastic dominance in answering this question.)