Two recent graduates from business school (Mark Van and Sheila Epps) decided to set up an investment company to acquire home mortgages that are in default but that they hope to restructure in ways that make it possible for the homeowner to continue making pay- ments and thus retain ownership of their home. To evaluate the feasibility of their in- vestment strategy, Mark and Sheila decided to evaluate their funds performance under different economic conditions applied to the coming year. Specifically, they estimated their funds performance for the next year under each of four states of the economy and estimated the probability of each state:

a) Based on these potential outcomes, what is your estimate of the expected rate of re- turn 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 but you double your money if the economy enters into a rapid expansion.

\begin{tabular}{lcc} \hline State of the Economy & Probability & Fund Return \\ \hline Rapid expansion and recovery & 5% & 100% \\ Modest growth & 30% & 35% \\ Continued recession & 55% & 5% \\ Falls into depression & 10% & 100% \\ \hline \end{tabular}