A financial investor has an investment portfolio. A bond in her investment portfolio will mature next month and provide her $25,000 to reinvest. The choices for reinvestment have been narrowed to the following two options:Option 1: Reinvest in a foreign bond that will mature in one year. Thistransaction will entail a brokerage fee of $150. For simplicity, assume thatthe bond will provide interest over the one-year period of $2,450, $2,000, or $1,675 and that the probabilities of these occurrences are assessed to be 0.25, 0.45, and 0.30, respectively.Option 2: Reinvest in a $25,000 certificate with a savings and loan association.Assume that this certificate has an effective annual rate of 7.5%.Which form of reinvestment should the investor choose in order to maximize her expected financial gain?
A financial investor has an investment portfolio. A bond in her investment portfolio will mature next month and provide her $25,000 to reinvest. The choices for reinvestment have been narrowed to the following two options:
Option 1: Reinvest in a foreign bond that will mature in one year. This
transaction will entail a brokerage fee of $150. For simplicity, assume that
the bond will provide interest over the one-year period of $2,450, $2,000, or $1,675 and that the probabilities of these occurrences are assessed to be 0.25, 0.45, and 0.30, respectively.
Option 2: Reinvest in a $25,000 certificate with a savings and loan association.
Assume that this certificate has an effective annual rate of 7.5%.
Which form of reinvestment should the investor choose in order to maximize her expected financial gain?
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