Question

In the decision tree shown, the fund with the lowest expected return is ...

Answer 1

The fund with the lowest expected return in the decision tree is the first investment.

Step-by-step explanation:

The decision tree provided determines the expected returns for three different investments. To determine the fund with the lowest expected return, you need to calculate the expected values for each investment.

1. For the first investment, multiply the probabilities by the corresponding profit/loss amounts. The expected value is calculated as: (0.10 x $5,000,000) + (0.30 x $1,000,000) + (0.60 x -$1,000,000) = $100,000 + $300,000 - $600,000 = -$200,000
2. For the second investment, the expected value is: (0.20 x $3,000,000) + (0.40 x $1,000,000) + (0.40 x -$1,000,000) = $600,000
3. For the third investment, the expected value is: (0.10 x $6,000,000) + (0.70 x $0) + (0.20 x -$1,000,000) = $600,000

Based on the calculations, the fund with the lowest expected return is the first investment with an expected value of -$200,000.