Question

One of Sam's investments is going to mature, and she wants to determine how to invest the proceeds of $120,000. Sam is considering two new investments: a stock mutual fund and a one-year certificate of deposit (CD). The CD is guaranteed to pay a 1.75% return. Sam estimates the return on the stock mutual fund as 7%, 1.15%, or -9%, depending on whether market conditions are good, average, or poor, respectively. Sam estimates the probability of a good, average, and poor market to be 30%, 45%, and 25%, respectively.

Construct a payoff table (in dollars) for this problem and decide what decision should be made according to the optimistic approach?

Answer 1