James Fromholtz is considering whether to invest in a newly formed investment fu

Question

James Fromholtz is considering whether to invest in a newly formed investment fun. 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 peforms in the coming year. Specifically, he suggested the follwing possible outcomes.

a. The expected rate of return from this investment opportunity is what %?
b. Would you be intersted in making such and investment?

state of Economy Probability Fund Returns Rapid expansion and recovery 10% 100% Modest growth 50% 30% Continued recession 30% 20% Falls into depression 10% -100%

Explanation / Answer

b) Expected return from investment is positive doesn’t mean that one should necessarily invest.

a) state of Economy Probability Fund Returns E ( r ) = Probability * fund return Rapid expansion and recovery 10% 100% 10% Modest growth 50% 30% 15% Continued recession 30% 20% 6% Falls into depression 10% -100% -10%

b) Expected return from investment is positive doesn’t mean that one should necessarily invest.

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

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