Question

Maria just inherited $10,000. Her bank has a savings account that pays 4.1% interest per year. Some of her friends recommended a new mutual fund, which has been in business for three years. During its first year, the fund went up in value by 10%; during the second year, it went down by 22%; and during its third year, it went up by 12%. Maria is attracted by the mutual fund's potential for relatively high earnings but concerned by the possibility of actually losing some of her inheritance. The bank's rate is low, but it is insured by the federal government. Use decision theory to find the best investment. (Assume that the fund's past behavior predicts its future behavior).

Answer 1

Answer:

Step-by-step explanation:

From the given information, it is evident that there is no assurance that the value of the mutual funds will give, and perhaps by looking at the trend, there is a net expected value of (10% - 22% + 12%) = 0% which literally doesn't differ from the what is given by the bank is a guaranteed one. From the perspective of decision theory, the best option is to use a bank because we would likely need to go for a guaranteed interest as opposed to going for an unexpected share.