Decide whether to reinvest his gains or pull out altogether

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Reference no: EM132027004

DECISION TREE MODEL An investor has an option to invest $20,000 in one of three accounts for a year. Account 1 offers a return of 2% and at a low risk. Account 2 offers a return of 4% and has a medium risk. Account 3 offers a return of 5% but at a high risk. Assuming low, medium and high risk investments have a 95%, 80% and 60% chances respectively of yielding expected the expected return or incur a negligible loss on the original sum. Additionally if he makes a gain on the high risk account he must decide whether to reinvest his gains or pull out altogether. a. Organize and outcomes given with a payoff matrix b. Represent this information in a decision tree, illustrating all possible choices and outcomes in the scenario as well as the payoff associated with each option c. Based on the expected value of the payoff for each scenario what is the best course of action d. State any assumptions in your decision model.

Reference no: EM132027004

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