An investor wants to select one of the six mutual funds for the coming year. Data showing the percentage annual return for each fund during five typical one year periods are shown here (hence five outcomes): Outcomes Year A Year B Year C Year D Year E Mutual Fund 38.5 24.0 29.6 11.2 -12.1 Large Cap 34.6 25.9 -0.7 51.2 -23.7 Mid Cap 22.4 26.7 4.8 36.9 7.4 Small Cap 48.7 3.5 30.6 78.9 -34.5 Health Sector 26.5 41.9 -30.1 22.2 16.7 Tech Sector 47.8 38.2 2.2 -16.8 95.4 a) Assume the investor is conservative, what is the recommended fund? What are the maximum and minimum returns of your decision? b) Suppose we were given the probabilities of 0.1, 0.2, 0.2, 0.1, and 0.4. Using the expected value table what is the recommended mutual fund? What is the expected return? c) What is the EMV for the fund in part A? How much of an increase can be obtained by following the recommendation of part B? d) What are the EOL values? Which of the two funds appears to have more EOL? Which fund would you recommend? Explain.
An investor wants to select one of the six mutual funds for the coming year. Data showing the percentage annual return for each fund during five typical one year periods are shown here (hence five outcomes):
|
|
Outcomes |
||||
|
|
Year A |
Year B |
Year C |
Year D |
Year E |
|
Mutual Fund |
38.5 |
24.0 |
29.6 |
11.2 |
-12.1 |
|
Large Cap |
34.6 |
25.9 |
-0.7 |
51.2 |
-23.7 |
|
Mid Cap
|
22.4 |
26.7 |
4.8 |
36.9 |
7.4 |
|
Small Cap |
48.7 |
3.5 |
30.6 |
78.9 |
-34.5 |
|
Health Sector |
26.5 |
41.9 |
-30.1 |
22.2 |
16.7 |
|
Tech Sector |
47.8 |
38.2 |
2.2 |
-16.8 |
95.4 |
a) Assume the investor is conservative, what is the recommended fund? What are the maximum and minimum returns of your decision?
b) Suppose we were given the probabilities of 0.1, 0.2, 0.2, 0.1, and 0.4. Using the expected value table what is the recommended mutual fund? What is the expected return?
c) What is the EMV for the fund in part A? How much of an increase can be obtained by following the recommendation of part B?
d) What are the EOL values? Which of the two funds appears to have more EOL? Which fund would you recommend? Explain.
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What are the EOL values? Which of the two funds appears to have more EOL? Which fund would you recommend? Explain.
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