You are considering the risk-return profile of two mutual funds for investment.

Question

You are considering the risk-return profile of two mutual funds for investment. The relatively risky fund promises an expected return of 14% with a standard deviation of 21.6%. The relatively less risky fund promises an expected return and standard deviation of 5% and 7%, respectively. Assume that the returns are approximately normally distributed. Use Table 1.

a-1. Calculate the probability of earning a negative return for each fund. (Round "z" value to 2 decimal places and final answer to 4 decimal places.)

A) Probability Riskier fund

B) Less risky fund

a-2. Which mutual fund will you pick if your objective is to minimize the probability of earning a negative return?

b-1. Calculate the probability of earning a return above 8.8% for each fund. (Round "z" value to 2 decimal places and final answer to 4 decimal places.)

A) Probability Riskier fund

BLess risky fund

b-2. Which mutual fund will you pick if your objective is to maximize the probability of earning a return above 8.8%?

Explanation / Answer

as we know that z score =(X-mean)/std deviation

a-1)

A)Probability Riskier fund :P(X<0) =P(Z<-0.6481)= 0.2584

B)Less risky fund : P(X<0)=P(Z<-0.7143)=0.2375

a-2)  Less risky fund

b-1)

Probability Riskier fund : P(X>8.8) =P(Z>-0.2407)=0.5951

B) Less risky fund :P(X>8.8)=P(Z>0.5429) =0.2936

b-2)  Riskier fund

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