You are considering tw o m utual funds for your investment.

The possible returns for the funds are dependent on the state of the economy and are given in the accompanying table.

You believe that the likelihood is 20% that the economy w ill be good, 50% that it w ill be fair, and 30% th a t it w ill be poor.

a. Find the expected value and the standard deviation of returns for Fund 1.

b. Find the expected value and the standard deviation of returns for Fund 2.

c. Which fund will you pick if you are risk averse? Explain. L05

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State of the Economy Fund 1 Fund 2 Good 20% 40% Fair 10% 20% Poor -10% -40%