are these answers right? James Fromholtz is considering whether to invest in a n
ID: 2736888 • Letter: A
Question
are these answers right?
James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? Calculate the standard deviation in the anticipated returns found in. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. The expected rate of return from this investment opportunity is. (Round to two decimal places) The investment's standard deviation is % (Round to two decimal places) Would you be interested in making such an investment? (Select the best choice below.) Yes. I would be interested in making such an investment. The economy is most likely to begin a rapid expansion and recovery. Your interest in making such an investment would depend on your risk tolerance. If you do not like risk you should avoid this investment, however if you do not mind risk you may want to make this investment. No. I would not be interested in making such an investment. The economy is most likely to sink into a depression.Explanation / Answer
A
State of Economy
Probability
Fund returns
Probability * Fund returns
Rapid expansion and recovery
5%
100%
5.00%
Modest growth
50%
45%
22.50%
Continued recession
40%
20%
8.00%
Falls into depression
5%
-100%
-5.00%
Total
30.50%
Expected return = 30.50%
B.
State of Economy
Probability
Fund returns
(Fund return - Expected return)^2
(Fund return - Expected return)^2*Probability
Rapid expansion and recovery
5%
100%
0.4830
0.024151
Modest growth
50%
45%
0.0210
0.010513
Continued recession
40%
20%
0.0110
0.00441
Falls into depression
5%
-100%
1.7030
0.085151
Total
0.124225
Variance = 0.124225
Standard deviation = square root of variance = 0.1242251/2 = 0.3525 = 35.25%
C.
Answer for C is B.
State of Economy
Probability
Fund returns
Probability * Fund returns
Rapid expansion and recovery
5%
100%
5.00%
Modest growth
50%
45%
22.50%
Continued recession
40%
20%
8.00%
Falls into depression
5%
-100%
-5.00%
Total
30.50%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.