Chapter 11.6, Problem 66E

You’re given the option of investing $10,000 in one of three mutual funds. A prominent market analyst posts the following estimates of performance for the three funds. The Hetrick Fund: 40% chance of a 35% gain; 40% chance of a 30% loss; 20% chance of breaking even. The Abercrombie Fund: 80% chance of breaking even; 12% chance of an 18% gain; 8% chance of a 9% loss. The Goldberg Fund: 25% chance of a 90% gain; 25% chance of a 5% gain; 40% chance of breaking even; 10% chance of losing everything. Answer parts (a) and (b) without doing any calculations.

(a)    If your primary objective is to shoot for the largest possible return without regard to risk, which would you be likely to choose?

(b)    If your primary objective is the least risk of losing big, which would you be likely to choose?

(c)    Find the expected value for each fund. With these choices, who would be most likely to be successful: a timid investor or an aggressive one?