Use the Information Below to Answer the Following Question(s) The Probability of Rates Rising Is 0

question 18

Multiple Choice

Use the information below to answer the following question(s) . Below is a payoff table that lists four mortgage options: $\begin{array}{|l|l|l|l|}\hline &\text { Outcome }\\\hline \text { Probability } & {\mathbf{0 . 6}} &{\mathbf{0 . 3}} &{\mathbf{0 . 1}} \\\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\\hline \text { 1-year ARM } & \$ 68,246 & \$ 47,487 & \$ 36,450 \\\hline \text { 3-year ARM } & \$ 64,897 & \$ 49,356 & \$ 44,898 \\\hline \text { 5-year ARM } & \$ 57,240 & \$ 52,988 & \$ 50,642 \\\hline \text { 30-year fixed } & \$ 59,720 & \$ 59,720 & \$ 59,720 \\\hline\end{array}$ The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1. Answer the following questions by creating a decision tree.
-Which of the following is considered the worst expected value decision?

• A) 1-year ARM
• B) 3-year ARM
• C) 5-year ARM
• D) 30-year fixed