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An investor is considering how to invest her money. She has two options - either a domestic mutual fund that only invests in the Pharmaceuticals,
An investor is considering how to invest her money. She has two options - either a domestic mutual fund that only invests in the Pharmaceuticals, Biotechnology & Life Sciences sector or an international aggressive mutual fund that invests in promising startups in the Materials sector. The payoff (profit) after one year for these investments depends on the state of economy. The investor thinks that there is 0.55 probability that economy will improve and 045 probability that economy will decline. The estimated payoffs are shown in the table below. State of the Economy Economy Improves (0.55) Economy Declines (0.45) Domestic Mutual Fund 2.200 900 Decision International 6,400 900 Mutual Fund Construct a decision tree for this problem. payoff 1 Economy Improves probability Domestic MF Economy declines probablyry payoff2 payoff 3 Economy inwords probabilay International MF Economy declines probability 4 payoff 4 (a) Fill in the probability tree values: probability 1: probability 2 probability 3 probability 4 payoff 1: payoff 2: payoff 3: payoff 4: Round your answers in part (b) to the nearest dollar. (b) Calculate the EMV values: EMV(Domestic Mutual Fund) = EMV(International Mutual Fund) = (c) Where should the money be invested? OInternational Mutual Fund O Domestic Mutual Fund
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