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 7.5% with a standard deviation of 11.2%. The relatively less risky fund promises an expected return and standard deviation of 4.8% and 6.7%, respectively. Assume that the returns are approximately normally distributed. Calculate the probability of earning a negative return for each fund. (Round final answer to 4 decimal places.) Which mutual fund will you pick if your objective is to minimize the probability of earning a negative return? Riskier fund Less risky fund Calculate the probability of earning a return above 9.7% for each fund. (Round final answer to 4 decimal places.) Which mutual fund will you pick if your objective is to maximize the probability of earning a return above 9.7%? Riskier fund Less risky fund

Explanation / Answer

a-1) riskier fund P(X<0)=P(Z<(0-7.5)/11.2)=P(Z<-0.6696)=0.2515

less risky fund P(X<0)=P(Z<(0-4.8/6.7)=P(Z<-0.7164)=0.2369

a-2) less risky fund

b-1)riskier fund P(X>9.7)=1-P(Z<(9.7-7.5)/11.2)=1-P(Z<0.1964)=1-0.5779=0.4221

less risky fund P(X>9.7)=1-P(Z<(9.7-4.8)/6.7)=1-P(Z<0.7313)=1-0.7677=0.2323

b-2) riskier fund

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