Q51226a A private investment firm has ₹10 crores available in cash. It can invest the money in a bank at 10% yielding a return of ₹15 crore over five years (ignore compound interest).

Alternatively it can invest in mutual funds, of which there are currently two available.

If it invests in Mutual Fund A there is a 0.5 chance of it being a success yielding ₹ 20 crore, and a 0.5 chance of it failing leading to a loss of ₹5 crore. (over the five year period)

If it invests in Mutual Fund   B there is a 0.6 chance of the project being a success yielding

₹30 crore and a 0.4 chance of it failing leading to a loss of ₹2 crore. (over the five year period) Show the most feasible solution by the help of decision tree.

Solution:

Working out the likely outcomes:

Invest in bank – return = ₹ 15 cr

Expected Value of investment in Mutual Fund A

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Expected Value of investment in Mutual Fund B

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