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 is hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hing on how the national economy performs in the coming year. Specifically, he suggested the following outcomes: State of the Economy Probability Fund Return Rapid expansion and recovery 5% 100% Modest growth 45% 35% Continued Recession 45% 5% 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 invested in such an investment? note that your money in one year if the economy callapses into the worst state or you double your money iif the economy enters into a rapid expansion. (Hint calculate the Standard deviation and comment on the risk-return tradeoff)
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 is hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hing on how the national economy performs in the coming year. Specifically, he suggested the following outcomes:
| State of the Economy | Probability | Fund Return |
| Rapid expansion and recovery | 5% | 100% |
| Modest growth | 45% | 35% |
| Continued Recession | 45% | 5% |
| Falls into depression | 5% | -100% |
a. Based on these potential outcomes, what is your estimate of the expected rate of
b. Would you be invested in such an investment? note that your money in one year if the economy callapses into the worst state or you double your money iif the economy enters into a rapid expansion.
(Hint calculate the Standard deviation and comment on the risk-return tradeoff)
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