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Rapid expansion and recovery 5% 100% Modest growth 30% 35% Continued recession 55% 5% Falls into depression 10% -100% 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. (Computing the standard deviation for an individual investment) (Related to Checkpoint 8.2 on page 263) Calculate the standard deviation in the anticipated returns found in Problem 8-1

Rapid expansion and recovery 5% 100% Modest growth 30% 35% Continued recession 55% 5% Falls into depression 10% -100% 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. (Computing the standard deviation for an individual investment) (Related to Checkpoint 8.2 on page 263) Calculate the standard deviation in the anticipated returns found in Problem 8-1

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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8–1. (Computing the expected rate of return) (Related to Checkpoint 8.1 on page 257) 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 fund's performance under different economic conditions applied to the coming year. Specifically, they estimated their fund's performance for the next year under each of four states of the economy and estimated the probability of each state: State of the Economy Probability Fund Return Rapid expansion and recovery 5% 100% Modest growth 30% 35% Continued recession 55% 5% Falls into depression 10% -100% 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. 8-2. (Computing the standard deviation for an individual investment) (Related to Checkpoint 8.2 on page 263) Calculate the standard deviation in the anticipated returns found in Problem 8–1.
Transcribed Image Text:8–1. (Computing the expected rate of return) (Related to Checkpoint 8.1 on page 257) 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 fund's performance under different economic conditions applied to the coming year. Specifically, they estimated their fund's performance for the next year under each of four states of the economy and estimated the probability of each state: State of the Economy Probability Fund Return Rapid expansion and recovery 5% 100% Modest growth 30% 35% Continued recession 55% 5% Falls into depression 10% -100% 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. 8-2. (Computing the standard deviation for an individual investment) (Related to Checkpoint 8.2 on page 263) Calculate the standard deviation in the anticipated returns found in Problem 8–1.
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