4. You have the chance to invest your money in either a 7.5% bond that sells at face value or an aggressive growth stock that pays only 1% dividend. If inflation is feared, the interest rate will go up to 8%, in which case the principal value of the bond will go down by 10%, and the stock value will go down by 20%. If recession materializes, the interest rate will go down to 6%. Under this condition, the principal value of the bond is expected to go up by 5%, and the stock value will increase by 20%. If the economy remains unchanged, the stock value will go up by 8% and the bond principal value will remain the same. Economists estimate a 20% chance that inflation will rise and 15% that recession will set in. Assume that you are basing your investment decision on next year's economic conditions.

(a) Represent the problem as a decision tree.

(b) Would you invest in stocks or bonds?