One of Mabel Smith’s investments is going to mature, and hewants to determine how to invest the proceeds of $30,000. Mabel isconsidering two new investments: a stock mutual fund and a one-yearcertificate of deposit (CD). The CD is guaranteed to pay an 8%return. Mabel estimates the return on the stock mutual fund as 16%,9%, or 22%, depending on whether market conditions are good,average, or poor, respectively. Mabel estimates the probability ofa good, average, and poor market to be 0.1, 0.85, and 0.05,respectively.
a. What decision should be made according to the EMV decisionrule?
b. What decision should be made according to the EOL decisionrule?
c. How much should Mabel be willing to pay to obtain a marketforecast that is 100% accurate?
