Security market line: james fromholtz is considering whether to invest in a newly formed investment fund. The funds 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 funds performance will hinge on how the national economy performs in the coming years. Specifically, he suggested the following possible outcomes; james has estimated the expected rate of return from this investment is 20.75%. james wants to apply his recently acquired understanding of the security market line concept to his analysis.

State of economy	Probability	Fund returns
Rapid expansion & recovery	10%	100%
Modest growth	35%	40%
Continued recession	45%	15%
Falls into depression	10%	-100

A if the risk free rate of interest is current 2.8% and the beta for the investment is 2.8, what is the slope of the security market line for the real estate mortgage security investment? B james is also considering the investment of his money in a market index fund that has an expected rate of return of 9%. What is the slope of the security market line( i.e. the reward to risk ratio) for this investment opportunity ? C. based on your analysis of part a and b above, which investment should james take? Why?

A. if the risk free rate of interest is currently 2.8% and the beta for the investment is 2.8, the slope of the security market line for the real estate mortgage security investment is _____ round to two decimal places.

B. James is also considering the investment of his money in a market index fund that has an expected rate of return of 9%. The slope of the security market line (i.e, the reward to risk ratio) for this investment opportunity is _______round to two decimal places.

C. Based on your analysis of parts a and b above, which investment should jams take? Why? Select the best choice

a the market index fund

b the real state portfolio

c cannot be determined from the information given in this problem.