MHB Basic problem about investment (basic percentages, and econ/finance).

[thiagowinters]

Liam and Ben are two friends who started studying the world of Finance and have different expectations for inflation in the coming years. Liam estimates inflation of 5% per year and Ben estimates inflation of 4% per year. Suppose they have the following options available for investment:

1. Fund 1, which pays a rate of 8.6% per year;
2. Fund 2, which pays a CPI rate (inflation rate) + 3.75% per year.

What should they do?

a) Liam should invest in fund 1 and Ben in fund 2

b) Liam should invest in fund 2 and Ben in fund 1

c) both must invest in fund 1

d) both must invest in fund 2

 

[HOI]

Let the amount invested be A.
Investing in Fund 1 pays 0.086A.

If inflation is 5%, investing in Fund 2 will pay 0.0875A which is more than 0.086A.
If inflation is 4%, investing in Fund 2 will pay 0.0775A which is less than 0.86A.

Liam should in fund 2 and Ben should invest in fund 1.