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 12.9% with a standard deviation of 16.7%. The relatively less risky fund promises an expected return and standard deviation of 4% and 6.7%, respectively. Assume that the returns are approximately normally distributed. Use Table 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.)

Which mutual fund will you pick if your objective is to minimize the probability of earning a negative return?

Calculate the probability of earning a return above 8.2% for each fund. (Round "z" value to 2 decimal places and 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 8.2%?

You are considering the risk-return profile of two mutual funds for investment. The relatively risky fund promises an expected return of 12.9% with a standard deviation of 16.7%. The relatively less risky fund promises an expected return and standard deviation of 4% and 6.7%, respectively. Assume that the returns are approximately normally distributed. Use Table 1.

Explanation / Answer

a-1)  Riskier fund : P(X<0)=P(Z<(0-12.9)/16.7)=P(Z<-0.7725)=0.2199

Less risky fund: P(X<0)=P(Z<(0-4)/6.7)=P(Z<-0.5970)=0.2752

a-2)Riskier fund

b-1)

Riskier fund: P(X>8.2)=P(Z>(8.2-12.9)/16.7)=P(Z>-0.2814)=0.6108

Less risky fund :P(X>8.2)=P(Z>(8.2-4)/6.7)=P(Z>0.6269)=0.7346

b-2)Riskier fund

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