Expected Rate of Return: James Fromholtz is considering whether to invest in a n
ID: 2738716 • Letter: E
Question
Expected Rate of Return:
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:
a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?The expected rate of return from this investment opportunity is ____________%. (Round to two decimal places)
b. Would you be interested in making such an investment?(Select the best choice below.)
A. 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.
B. Yes, I would be interested in making such an investment. The economy is most likely to begin a rapid expansion and recovery.
C. No, I would not be interested in making such an investment. The economy is most likely to sink into a depression
State of Economy Probability Fund Returns Rapid expension & recovery 10% 100% Modest growth 40% 40% Continued recession 40% 15% Falls into depression 10% -100%Explanation / Answer
State of Economy Probability Fund Returns Expected Return Rapid expension & recovery 10.00% 100.00% 10.00% Modest growth 40.00% 40.00% 16.00% Continued recession 40.00% 15.00% 6.00% Falls into depression 10.00% -100.00% -10.00% Expected Return 22.00% A. 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.
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