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You are a rational investor and would like to invest some money in a fund. Your required rate of return is 10%. Your broker called
You are a rational investor and would like to invest some money in a fund. Your required rate of return is 10%. Your broker called and present your with 2 choices:
1. Fund A requires $1,000 upfront investment, and pays you $400 end of year 1, $800 end of year 2, and $200 end of year 3;
2. Fund B also requires $1,000 upfront investment, and pays you $800 end of year 1, $400 end of year 2, and $200 end of year
Which one would you choose? Please state clearly your criteria and the formulas you use to reach that decision.
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