One of Mabel Smith’s investments is going to mature, and he wants to determine how to...

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One of Mabel Smith’s investments is going to mature, and hewants to determine how to invest the proceeds of $30,000. Mabel isconsidering two new investments: a stock mutual fund and a one-yearcertificate of deposit (CD). The CD is guaranteed to pay an 8%return. Mabel estimates the return on the stock mutual fund as 16%,9%, or 22%, depending on whether market conditions are good,average, or poor, respectively. Mabel estimates the probability ofa good, average, and poor market to be 0.1, 0.85, and 0.05,respectively.
a. What decision should be made according to the EMV decisionrule?
b. What decision should be made according to the EOL decisionrule?
c. How much should Mabel be willing to pay to obtain a marketforecast that is 100% accurate?

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4.4 Ratings (679 Votes)

We calculate Value for each state of nature as shown belowCD8 30000 2400 for all states of natureStock Mutual Fund16 30000 48009 30000 270022 30000 6600We prepare a payoff table as shown below and find EMVThe above table in the form of formulas is shown below forbetter understanding and See Answer

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