calculate 1 value: 10.00 points You are considering two mutual funds for your in

Question

calculate 1

value: 10.00 points You are considering two mutual funds for your investment. The possible returns for the funds are dependent on the state of the economy and are given in the accompanying table. State of the Economy Good Fair Poor Fund 1 Fund 2 20% 10% -10% 40% 20% 40% You believe that the likelihood is 20% that the economy will be good, 50% that it will be fair, and 30% that it will be poor a. Find the expected value and the standard deviation of returns for Fund 1. (Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.) Fund 1 Expected value Standard deviation b. Find the expected value and the standard deviation of returns for Fund 2. (Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.) Fund 2 Expected value Standard deviation c. Which fund will you pick if you are risk averse? Fund 2

Explanation / Answer

a)

FOR FUND 1:

Thus,  
  
E(x) = Expected value = mean = Sum(xP(x)) =    6 [ANSWER]

Also,

Var(x) = E(x^2) - E(x)^2 =    124

Hence,

s(x) = sqrt [Var(x)] =    11.13552873 [ANSWER, STANDARD DEVIATION]

***************************************************

b)

FOR FUND 2:

Thus,  
  
E(x) = Expected value = mean = Sum(xP(x)) =    6 [ANSWER]

As

Var(x) = E(x^2) - E(x)^2 =    964

Then

s(x) = sqrt [Var(x)] =    31.04834939 [ANSWER]

*******************************************

c)

You will then pick the one with less standard deviation, which is FUND 1. [ANSWER]

x P(x) x P(x) x^2 P(x) 20 0.2 4 80 10 0.5 5 50 -10 0.3 -3 30

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.