Suppose that the Bad Living mutual fund cams -15% in high-growth years, 0% in no

Question

Suppose that the Bad Living mutual fund cams -15% in high-growth years, 0% in normal-growth years, and 20% in recession years. c. Based on the above probabilities, what is the expected return on this mutual fund over the next year? d. Explain why a wise risk-averse investor might own shares in both the Had Living mutual fund and in a general stock-markct fund. e. "The Bad Living mutual fund lias a negative beta." Explain (i) what that means and (ii) why a negative-beta fund could be a good addition to one's financial portfolio.

Explanation / Answer

c. if we consider the same proportion of amount invested the returns will be= 0.33*-15+0.33*0+0.33*20= 6.6-4.95=1.65%

d. the investor needs to diversify his risk, that is why he invested in both the stocks. if one carries higher risk, the second one carries lower risk.

e. negative BETA means, if the market increases by 1 point, the stock will declined by 1 point, and vice versa.

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