Question: A financial advisor has recommended two possible mutual funds for investment: Fund A and Fund B. The return that will be achieved by each of

A financial advisor has recommended two possible
mutual funds for investment: Fund A and Fund B.
The return that will be achieved by each of these
depends on whether the economy is good, fair, or
poor. A payoff table has been constructed to illustrate this situation:
STATE OF NATURE
GOOD FAIR POOR
INVESTMENT ECONOMY ECONOMY ECONOMY
Fund A $10,000 $2,000 $5,000
Fund B $6,000 $4,000 0
Probability 0.2 0.3 0.5
(a) Draw the decision tree to represent this situation.
(b) Perform the necessary calculations to determine
which of the two mutual funds is better. Which
one should you choose to maximize the expected
value?
(c) Suppose there is question about the return of
Fund A in a good economy. It could be higher or
lower than $10,000. What value for this would
cause a person to be indifferent between Fund A
and Fund B (i.e., the EMVs would be the same)?

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