Jeremy has $5000 to invest. If he puts the money in a certificate of deposit (CD), he is assured of receiving an effective 6.34% per year for 5 years. If he invests the money in stocks, he has a 50/50 chance of one of the following cash-flow sequences for the next 5 years.

Annual cash flows, $ Prob = 0.5

Stock1: year0 = -5000, year1-4= 250, year5=6800

Stock2: year0 = -5000, year1-4= 600, year5=5400

If he invests his $5000 in real estate for the 5 years with the following cash flow and probability estimates.

Annual cash flows, $

Year Prob = 0.3 Prob = 0.5 Prob = 0.2

0 -5000 -5000 -5000

1 -425 0 500

2 -425 0 600

3 -425 0 700

4 -425 0 800

5 9500 7200 5200

Show the expected rate of return calculation.

Construct a decision tree diagram and answer which of the three investment opportunities offers the best expected rate of return for Jeremy?