Question
Tom sold his old house in upstate New York and now has a sum of $175,000 for investment. Tom is considering select only one of
Tom sold his old house in upstate New York and now has a sum of $175,000 for investment. Tom is considering select only one of the three possible investments to invest his $175,000: a mutual fund (MF), a technology stock (TS), or a certificate of deposit (CD). The investment industry estimates the probability of a good, average, and poor market to be 42%, 27%, and 31%, respectively. The CD is guaranteed to pay a 3.5% return regardless of the market condition. The financial consultant estimates the return on the mutual fund (MF) as 7%, 2%, or -3%, depending on whether market condition is good, average, or poor, respectively. Under the same condition, the financial consultant estimates the technology stock (TS) would yield 9%, 5%, or -11%.
How much should Tom be willing to pay to obtain a market forecast that is 100% accurate?
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