The investment staff of TNC Bank is considering four investment proposals for a client: shares, bonds, real estate and savings certificate. The investment will be held for one year. The past data regarding the four proposals are given below:
Shares : there is a 25 percent chance that shares will decline by 10 percent, a 30 percent chance that they will remain stable and a 45 percent chance that they will increase in value by 15 percent. Also the shares under consideration do not pay any dividends.
Bonds : These bonds stand a 40 percent chance of increase in value by 5 percent and 60 percent chance of remaining stable and they yield 12 percent.
Real Estate : This proposal has a 20 percent chance of increasing 30 percent in value, a 25 percent chance of increasing in 20 percent value, a 40 percent chance of increasing in 10 percent value, a 10 percent chance of remaining stable and a 5 percent chance of losing 5 percent of its value.
Savings Certificate : These certificates yield 8.5 percent with certainty. Use a decision tree to structure the alternatives available to the investment staff, and using the expected value criterion, chose the alternative with the highest expected value.
Following are just a few steps from here and there from the original complete solution:
Expected Value at point 1 = ...
Solution to the posted problem is explained with step by step working and using a decision tree and it is explained how to formulate a decision tree using the given information. Four Investment proposals were given, shares, bonds, real estate and savings certificate. We have to find the best decision. It is given with all minute details.