An investor has $100,000 available for 1-year investment. The investor is weighing two options: a money market fund that gives a fixed annual return of 12% and an investment plan with an annual rate of return that can be regarded as a random variable with values that depend on prevailing economic conditions. Based on the second plan’s past history under a variety of economic conditions, a very reliable analyst has subjectively determined the following probabilities associated with several possible rates of return: Rate of Return Probability 0.3 0.20 0.25 0.20 0.20 0.30 0.15 0.10 0.10 0.10 0.05 0.10 Suppose there were a third investment plan with return rates and associated probabilities as follows: Rate of Return Probability 0.23 0.40 0.20 0.40 0.18 0.10 0.10 0.10 a) Between the second and the third investment plans, which should be selected? Explain carefully and show work.
An investor has $100,000 available for 1-year investment. The investor is weighing two options: a
Rate of Return Probability
0.3 0.20
0.25 0.20
0.20 0.30
0.15 0.10
0.10 0.10
0.05 0.10
Suppose there were a third investment plan with return rates and associated probabilities as follows:
Rate of Return Probability
0.23 0.40
0.20 0.40
0.18 0.10
0.10 0.10
a) Between the second and the third investment plans, which should be selected? Explain carefully and show work.
given data
an investor has $100,000 available to investment he has two investments to invest
option one gives a 12% fixed annual return = $12000
in 2nd option
we get
rate of return probability actual return
0.3 0.20 0.06
0.25 0.20 0.05
0.20 0.30 0.06
0.15 0.10 0.015
0.10 0.10 0.01
0.05 0.10 0.005
total expected return 0.2 * 100% = 20%
in option 2 we get 20% return
in option 3
rate of return probability actual return
0.23 0.40 0.092
0.20 0.40 0.08
0.18 0.10 0.018
0.10 0.10 0.01
total expected return 0.2 * 100% = 20%
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