CASE 2: Jeremy works as an analyst for a renowned wealth management firm in London. The firm specializes in serving high net worth clients. These clients prefer to invest in closely held private firms with very limited number of shareholders, each shareholder hav- ing a substantial stake. In the spring of 2020, when the market for firms providing support services to airlines (caterers, ground crew agencies, maintenance, etc.) collapsed due to the COVID-19 pandemic, Jeremy's firm saw an opportunity to purchase equity stakes in these firms at discounted prices from current investors trying to offload these stocks. The investment company plans to put together a fund for these stocks and hold them until the mar- ket for these securities recovers. It has made the following predic- tions regarding the fund's possible performance over the coming years as a function of how well the aviation industry does: State of the Economy Rapid expansion Modest growth No growth Contraction Probability 15% Fund Return 50% 45% 30% 40% 10% 5% -80% Jeremy's supervisor has asked him to prepare a preliminary analysis of the new fund's performance potential for coming years. He has specifically asked Jeremy to address the following four issues: a. What is the expected rate of return and standard deviation for the fund given the estimates of fund performance in dif- ferent states of the economy? b. What is the reward-to-risk ratio for the fund based on the fund's standard deviation as a measure of risk? c. What is the expected rate of return for the fund based on the CAPM? d. In addition to this information provided, Jeremy has also gathered some additional data. He has observed that the risk-free rate of interest in the market for the coming year is 3 percent, the market risk premium is 5 percent, and the beta for the new investment is 4. Based on your analysis, do you think the proposed fund offers a fair return given its risk? Explain.