Allen estimates the probability of a good market

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Q. 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, explain 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 the bank than in the market. During the next year, Allen must decide whether to invest $10,000 in the stock market or certificate of deposit (CD) at an interest rate of 9%. If the market is good, Allen believes that he could get 14% return on his money. With a fair market, he expects to get 8% return. If the market is bad, he will most likely get no return at all-in other words, the return would be 0%. Allen estimates that the probability of a good market is 0.4, the probability of fair market is 0.4 and the probability of a bad market is 0.2 and he wishes to maximize his long-run average return.

Reference no: EM13101004

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