(Expected rate of return and risk) B.J Gautney Enterprises

(Expected rate of return and risk) B.J Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.6 percent. Calculate the investments expected return and its standard deviation should Gautney invest in this security? Probability Return 0.05 -4% 0.45 1% 0.45 7% 0.05 9% The investments expected return is . % (Expected rate of return) 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 year. Specifically he suggested the following outcomes: Based on these potential outcomes what is your estimate of the expected rate of return from this investment opportunity? 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 The expected rate of return from this investment opportunity is . % State of Economy Probability Fund Return Rapid expansion and recovery 10% 100% Modest growth 35% 40% Continued recession 45% 20% Falls into depression 10% -100% (Expected rate of return) 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 year. Specifically he suggested the following outcomes: Data Table State of Economy Probability Fund Return Rapid expansion and recovery 10% 100% Modest growth 35% 45% Continued recession 50% 20% Falls into depression 10% -100% Based on these potential outcomes what is your estimate of the expected rate of return from this investment opportunity? Calculate the standard deviation in the anticipated return found in part a. Could 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 enter into a rapid expansion EXPECTED Rate of RETURN from this investment opportunity is =

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