Mikal wants to invest in a Registered Education Savings Plan (RESP). His financial advisor presents him with two portfolios: one high-risk and one low-risk. Knowing that returns depend on the financial markets, the advisor estimates a 60% chance that the market will do well. If the financial market is doing well, the low-risk portfolio will earn Michael $1,000 while the high-risk portfolio will earn him $2,500. On the contrary, if the financial market is doing badly, the low-risk portfolio will earn $950 while the high-risk portfolio will earn $100.

Question 1:

Draw the decision tree associated with these scenarios.

If Mikal is risk neutral, what investment will he choose? Explain.