An investor wants to select one of the following mutual funds for the coming year. Data showing the percentage annual return for each fund during five typical one-year periods are shown below. The assumption is that one of these five year periods will occur again during the coming year. Thus A, B, C, D and E are states of nature for the mutual fund decision. Outcomes Mutual Fund Year A Year B Year C Year D Year E Large Cap Stock 25.3 30.0 48.3 22.4 -19.8 Mid-Cap Stock 35.9 21.6 -9.9 62.3 -20.1 Small-Cap Stock 40.5 29.4 16.0 13.8 6.1 Energy Sector 35.4 23.2 -19.5 31.4 -12.2 Health Sector 49.1 5.5 89.5 70.4 -20.5 Tech Sector 46.2 37.2 46.9 40.5 -16.2 Real Estate Sector 18.9 35.0 -20.0 24.6 13.2 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 0.2, 0.1, 0.1, 0.3, and 0.3. 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 following mutual funds for the coming year. Data showing the percentage annual return for each fund during five typical one-year periods are shown below. The assumption is that one of these five year periods will occur again during the coming year. Thus A, B, C, D and E are states of nature for the mutual fund decision.
|
|
Outcomes |
||||
|
Mutual Fund |
Year A |
Year B |
Year C |
Year D |
Year E |
|
Large Cap Stock |
25.3 |
30.0 |
48.3 |
22.4 |
-19.8 |
|
Mid-Cap Stock |
35.9 |
21.6 |
-9.9 |
62.3 |
-20.1 |
|
Small-Cap Stock
|
40.5 |
29.4 |
16.0 |
13.8 |
6.1 |
|
Energy Sector |
35.4 |
23.2 |
-19.5 |
31.4 |
-12.2 |
|
Health Sector |
49.1 |
5.5 |
89.5 |
70.4 |
-20.5 |
|
Tech Sector |
46.2 |
37.2 |
46.9 |
40.5 |
-16.2 |
|
Real Estate Sector |
18.9 |
35.0 |
-20.0 |
24.6 |
13.2 |
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 0.2, 0.1, 0.1, 0.3, and 0.3. 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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