environment? A period of economic expansion? Explain your response. Mini-Case Lynch has been working for a year as an analyst for an The investment company began putting together sales in Larry investment company that specializes in serving very wealthy formation concerning the possible performance of the new fanx clients. These clients often purchase shares in closely held and has made the following predictions regarding the possibl performance of the new fund over the coming year as a functio tment funds with very limited numbers of stockholders. In the fall of 2008, the market for certain types of securities based of how on real estate loans simply collapsed as the subprime mortgage scandal unfolded. Larry's firm, however, sees this market col- lapse as an opportunity to put together a fund that purchases some of these mortgage-backed securities that investors havepid expansion shunned byacquiring them at bargain prices and holding them Modest"growth until the underlying mortgages are repaid or the marketfo th0wt well the economy does t-10% . "; 50% 4% : 35% 100% securities recovers. Larry's boss has asked him to perform a preliminary analy-In addition to the information provided above, Larry bas of he new fund's performance potential for the coming year. observed thit the risk-free rate of interest for the coming year is he has asked that Larry address each of the follow- 4.5 percent, the market risk premium is 5.5 percent, and the beta ing issues: What are the expected rate of return and standard deviation? Based on your analysis, do you think that the proposed fund 2 What is the reward-to-risk ratio for the fund based on the for the new investment is 3.55. offers a fair return given its risk? Explain. fund's standard deviation as a measure of risk? What is the expected rate of return for the fund based on the Capital Asset Pricing Model? 3