Question
One of Philip's investments is going to mature, and he wants to determine how to invest the proceeds of $50,000. Philip is considering two new
One of Philip's investments is going to mature, and he wants to determine how to invest the proceeds of $50,000. Philip is considering two new investments: a stock mutual fund and a one-year certificate of deposit (CD). The CD is guaranteed to pay a 3% return. Philip estimates the return on the stock mutual fund as 11%, 2%, or -9%, depending on whether market conditions are good, average, or poor, respectively. Philip estimates the probability of a good, average, and poor market to be 35%, 40%, and 25%, respectively.
(Question 1)Construct a payoff table (in dollars) for this problem.
(Question2) What decision should be made according to the optimistic approach?
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