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Sensitivity analysis

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You need to decide how to invest a graduation gift of $1000. The annual rate of return is given in the next table for each of the three different types of investments and three different states of the economy.

Recession Stable Economy Expansion
Investment A 2.5% 2.5% 2.5%
Investment B 2% 4% 5%
Investment C -2% 4% 10%

Create a table that gives the amount of money for each type of account and state of the economy after one year, if interest is compounded monthly.

Compute the expected value of your account at the end of one year for each of the investment types, if the probability of a recession is 0.5 and the probability of a stable economy is 0.3.

What investment would you choose? Why?

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Solution Summary

This solution provides a sample of the given finance problem calculated in Excel.

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** Please see the attached file for the complete solution response **

Recession Stable Expansion
Investment A 2.50% 2.50% 2.50%
Investment B 2% 4% 5%
Investment ...

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