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 11.1% with a standard deviation of 14.7%. The relatively less risky fund promises an expected return and standard deviation of 4% and 6%, 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.) Probability Riskier fund Less risky fund a-2. Which mutual fund will you pick if your objective is to minimize the probability of earning a negative return? O Less risky fund O Riskier fund b-1. Calculate the probability of earning a return above 9.1% for each fund. (Round "z" value to 2 decimal places and final answer to 4 decimal places.) Probability Riskier fund Less risky fund b-2. Which mutual fund will you pick if your objective is to maximize the probability of earning a returm above 9.1%? O Less risky fund O Riskier fund

Explanation / Answer

a1) Z=(0-11.1)/14.7=0.755 P(z<-0.7555)= 22.5%

Z2=(0-4)/6=-0.66 P(z<-0.666)=25.2%

b) We would select the riskier fund

c) Z1 = (9.1-11.1)/14.7 = -0.13 P(z>-0.13) =1- 0.448283 = 0.5517

Z2 = (9.1-4)/6=0.85 P(z>0.85)= 19.76%

d) We should select the riskier find

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