Reference no: EM132229526
Alison is a nurse who happens to be very risk-averse when it comes to financial matters. She makes $45,000 per year and has just inherited $10,000 from her great aunt Sylvia, who died last week of stress-induced heart failure while playing canasta. (Sylvia was 93 when she died.) Alison is trying to decide what to do with the $10,000. After researching rates on the Internet, she narrows her choices down to 2 options:
a. Put the money in a Savings Account with the following expected compound interest rates:
Now 1 Year from Now 2 yrs from Now After That
2.5% 3.0% 3.5% 3.5%
b. Put the money in a mutual fund with the following probabilities: ·
P(Goes Down 10% over 5 years) = 5% ·
P(Stays the same over 5 years) = 25% ·
P(Goes up 30% over 5 years)=45% ·
P(Goes up 50% over 5 years)=25%
Given Alison's strong risk-aversion, what is her best course of action and what is her risk adjusted expected value? Please use a 5-year planning horizon. You may either solve this problem by the PrecisionTree software.
Please solve this in Precision Tree and upload the excel sheet on google drive.