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​(Related to Checkpoint​ 8.2)  ​(Computing the standard deviation for an individual​ investment)  James Fromholtz is con

Posted: Thu May 19, 2022 5:26 am
by answerhappygod
​(Related to Checkpoint​ 8.2)  ​(Computing the standard
deviation for an individual​ investment)  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​%
40​%
Continued recession
50​%
20​%
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.  Calculate the standard deviation in the anticipated returns
found in part
a.
c.  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.
.