Recall the problem Lab 10: An investor is considering two different no-load mutual funds: the Allegiance 2030 or the Global Growth fund. An investor is considering two different mutual funds: Allegiance 2030 and the Global Growth. The yearly profits of the mutual funds are dependent upon how the market reacts each year. Recently the market has been oscillating around the 14,000 mark from one year end to the next, according to the probabilities given in the following transition matrix: 13,000 0.20 13,000 14,000 15,000 14,000 0.40 0.50 0.40 15,000 0.40 0.25 0.40 0.25 0.20 Each year that the market moves up (down) 1,000 points, the Allegiance 2030 has profits (losses) of $20,000, while the Global Growth fund has profits (losses) of $10,000. If the market moves up (down) 2,000 points in a year, the Allegiance 2030 fund has profits (losses) of $50,000, while the Global Growth fund has profits (losses) of only $25,000. If the market does not change, there is no profit or loss for either fund Suppose that instead of keeping their money in the same fund year after year, the investor decides each year whether to invest in Allegiance 2030 or the Global Growth based on the market. For example, one strategy is to invest in Allegiance 2030, if the market closed at 13,000 last year and invest in the Global Growth if the market closed at 14,000 or 15,000. Another strategy is the opposite: invest in Allegiance 2030 if the market closed at 14,000 or 15,000 last year, and invest in Global Growth if the market closed at 13,000. a) Identify all possible investment strategies. b) Find the long-run) expected average annual profit for each for each strategy you identified in part (a). c) Which investment strategy would you recommend in order to maximize (long-run) expected average profit per year? Recall the problem Lab 10: An investor is considering two different no-load mutual funds: the Allegiance 2030 or the Global Growth fund. An investor is considering two different mutual funds: Allegiance 2030 and the Global Growth. The yearly profits of the mutual funds are dependent upon how the market reacts each year. Recently the market has been oscillating around the 14,000 mark from one year end to the next, according to the probabilities given in the following transition matrix: 13,000 0.20 13,000 14,000 15,000 14,000 0.40 0.50 0.40 15,000 0.40 0.25 0.40 0.25 0.20 Each year that the market moves up (down) 1,000 points, the Allegiance 2030 has profits (losses) of $20,000, while the Global Growth fund has profits (losses) of $10,000. If the market moves up (down) 2,000 points in a year, the Allegiance 2030 fund has profits (losses) of $50,000, while the Global Growth fund has profits (losses) of only $25,000. If the market does not change, there is no profit or loss for either fund Suppose that instead of keeping their money in the same fund year after year, the investor decides each year whether to invest in Allegiance 2030 or the Global Growth based on the market. For example, one strategy is to invest in Allegiance 2030, if the market closed at 13,000 last year and invest in the Global Growth if the market closed at 14,000 or 15,000. Another strategy is the opposite: invest in Allegiance 2030 if the market closed at 14,000 or 15,000 last year, and invest in Global Growth if the market closed at 13,000. a) Identify all possible investment strategies. b) Find the long-run) expected average annual profit for each for each strategy you identified in part (a). c) Which investment strategy would you recommend in order to maximize (long-run) expected average profit per year
