You are considering two mutual funds for your investment. The possible returns f

Question

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.

You believe that the likelihood is 23% that the economy will be good, 57% that it will be fair, and 20% that it will be poor.

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.)

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.)

Which fund will you pick if you are risk averse?

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.

Explanation / Answer

calculation of the standard deviation 1 2 3 4 5 6 7 8 9 state of the economy likelihood return of fund 1 return of fund 2 expected value of fund 1 ( 1 * 2 ) expected value of fund 2 ( 1 * 2 ) return of fund 1 - total expected value 0f fund 1 return of fund 2 - total expected value 0f fund 2 variance of fund 1 ( 6 * 6 * 1 ) variance of fund 2 ( 7 * 7 * 1 ) good 23% 33% 35% 7.59% 8.05% 17.72% 22.06% 0.72% 1.12% fair 57% 17% 17% 9.69% 9.69% 1.72% 4.06% 0.02% 0.09% poor 20% -10% -24% -2.00% -4.80% -25.28% -36.94% 1.28% 2.73% total expected value 15.28% 12.94% 2.02% 3.94% standard deviation fund 1 fund 1 fund 1 1.42 fund 2 fund 2 fund 2 1.98 a fund 1 expected value 15.28% standard deviation 1.42 fund 2 b expected value 12.94% standard deviation 1.42 c answer fund 1 since the expected return is more and the standard deviation is less in fund 1 it has to be selected

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