Question: Below is a payoff table that lists four mortgage options: The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is

Below is a payoff table that lists four mortgage options: 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?

3-year ARM

5-year ARM

1-year ARM

30-year fixed

Probability Decision 1-year ARM 3-year ARM 5-year ARM 30-year fixed 0.6 Rates Rise $66,645 $62,857 $55,895 $52,276 Outcome 0.3 Rates Stable $43,650 $47,698 $50,894 $52,276 0.1 Rates Fall $38,560 $42,726 $48,134 $52,276

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