State Of Economy Probability Fund Returns

Rapid expansion and recovery 15% 100%

Modest growth 40% 45%

Continued Recession 30% 15%

Falls into depression 15% -100

( Computing the standard deviation for an individual investment) 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 has suggested to james that the funds performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes.

A) Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity.

B) Calculate the standard deviation in the anticipated returns found in part a.

C) Would you be interested in making such an investment? Note you loose all your money in one year if the economy collapses into the worst state or you double your money f the economy enters into a rapid expansion.

a) The expected rate of return from this investment opportunity is .%.( round two decimal places)

b) Yes, I would be interest in making such investment. The economy is most likely to begin to a rapid expansion and recovery........round two decimal places)

c) Your interest in making such an investment would depend on your risk tolerance. If you do not like risk you should avoid this investment, however if you do not mind risk you may want to make this investment.