James is considering whether to invest in a newly formed investment fund. The fu
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Question
James is considering whether to invest in a newly formed investment fund. The fund's investment objective is to aquire home mortgage securities at what hopes will be bargian prices. The fund sponsor suggested to james that the fund's preformancew 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? (Round two decimal places)
b. Calculate the standard deviation in the anticapted return found in part a. (Round two decimal places)
State of Economy Probability Fund Returns Rapid expansion and recovery 10% 100% Modest growth 50% 30% Continued recession 30% 10% Falls into depression 10% -100%Explanation / Answer
a. Calculation of expected returns
100%*10%+30%*50%+10*30%-100%*10%
10%+15%+3%-10% = 18%
Expected rate of return is 18%
(10-18)2=64
(15-18)2=9
(3-18)2=225
(-10-18)2=784
Total=1082/4=270.5
VARIANCE =SQRT270.5 =16.4%
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