(Related to Checkpoint 8.1)(Expected rate of return)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 15% 100% Modest growth 35% 45% Continued recession 35% 10% Falls into depression 15% -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 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.