Allen Young has always been proud of his personal investment strategies and has

ID: 2901916 • Letter: A

Question

Allen Young has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however, Allen has become very concerned about the stock market as a good investment. In some cases it would have been better for Allen to have his money in a bank than in the market. During the next year, Allen must decide whether to invest $10,000 in the stock market or in a certificate of deposit (CD) at an interest rate of 9%. If the market is good, Allen believes that he could get a 14% return on his money. With a fair market, he expects to get an 8% return. If the market is bad, he will most likely get no return at all

Explanation / Answer

Solution:

If the Certificate Deposit is made he will get surely :

$ 10,000 * 9% = 900 $ yearly.

For the market investment and the decision table:

Investment in

Market

Certificate

Deposit

Market Condition

Good Market

Fair Market

Poor Market

% Return

14 %

8 %

0 %

9 %

$ Value

1400

800

900

Probability

0.4

0.2

EMV $

(1400 *0.4)+(800 *0.4) +(0 * 0.2) = $ 880

$ 900

The best decision would be to invest in certificate deposits.