Use the Following information.
An investor wants to select one of the six mutual funds for the coming year. Data showing the percentage annual return for each fund during the five typical one year periods are shown here.
|
|
State of Nature
|
|
|
|
|
Year A
|
Year B
|
Year C
|
Year D
|
E
|
|
Mutual Fund
|
38.5
|
24
|
29.6
|
11.2
|
-12.1
|
|
Large Cap
|
34.6
|
25.9
|
-0.7
|
51.2
|
-23.7
|
|
Mid Cap
|
22.4
|
26.7
|
4.8
|
36.9
|
7.4
|
|
Small Cap
|
48.7
|
3.5
|
30.6
|
78.9
|
-34.5
|
|
Health Sector
|
26.5
|
41.9
|
-30.1
|
22.2
|
16.7
|
|
Tech Sector
|
47.8
|
38.2
|
2.2
|
-16.8
|
95.4
|
Question 1
Assume the investor is conservative, what is the recommended mutual fund? What are the maximum and minimum returns?
Question 2
Suppose we were given the probabilities of 0.2, 0.3, 0.1,0.1, and 0.3. Using the expected value table what is the recommended mutual fund? What is the expected return?
Question 3
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?
Question 4
Which of the two funds appears to have more EOL? Is the increase in EOL worth the potential increase in gain? Explain.