(Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The f
Posted: Thu May 19, 2022 12:21 am
(Expected rate of return) James Fromholtz is
considering whether to invest in a newly formed investment fund.
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 performs in the coming year.
Specifically, he suggested the following
possible outcomes:
State of Economy
Probability
Fund Returns
Rapid expansion and recovery
5%
100%
Modest growth
40%
45%
Continued recession
50%
15%
Falls into depression
5%
−100%
.
a. Based on these potential outcomes, what is your
estimate of the expected rate of return from this
investment opportunity?
b. Would you be interested in making such an investment?
Note that you lose all your money in one year if the economy
collapses into the worst state or you double your money if the
economy enters into a rapid expansion.
considering whether to invest in a newly formed investment fund.
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 performs in the coming year.
Specifically, he suggested the following
possible outcomes:
State of Economy
Probability
Fund Returns
Rapid expansion and recovery
5%
100%
Modest growth
40%
45%
Continued recession
50%
15%
Falls into depression
5%
−100%
.
a. Based on these potential outcomes, what is your
estimate of the expected rate of return from this
investment opportunity?
b. Would you be interested in making such an investment?
Note that you lose all your money in one year if the economy
collapses into the worst state or you double your money if the
economy enters into a rapid expansion.