Statistics Solutions

(Solution Library) Tom inherited $1,000 and has hired a broker to help him decide where to invest this money. Tom has narrowed down his choices to bond,

Question: Tom inherited $1,000 and has hired a broker to help him decide where to invest this money. Tom has narrowed down his choices to bond, stock and CD account. Depending on the macroeconomic conditions classified into recession, expansion, and no significant change, the broker has estimated the returns of Tom’s investment options. The following table summarizes this information that the broker made available to Tom:

Expansion No Change Expansion

Bond $220 $160 -$110

Stock $270 $180 -$210

CD account $70 $70 $70

  1. If Tom is an optimistic investor, what investment option will he likely pick? Explain the rationale behind his decision.
  2. If Tom is a pessimistic investor, what investment option will he likely pick? Explain the rationale behind his decision.
  3. The broker has also informed Tom that economic conditions of recession and expansion are equally likely, and no major change is twice likely as recession. Calculate the probabilities associated with the three economic conditions.
    P(Recession) =
    P(Expansion) =
    P(No Change) =
    (c) If Tom uses the expected payoff to make his investment decisions, what investment will he pick? Support your result with appropriate work.
    Price: $2.99
    Solution: The downloadable solution consists of 3 pages
    Deliverable: Word Document


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