(Related to Checkpoint 8.2) (Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's 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 fund's 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 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. a. The expected rate of return from this investment opportunity is %. (Round to two decimal places) b. The investment's standard deviation is ☐ %. (Round to two decimal places) c. Would you be interested in making such an investment? (Select the best choice below.) A. 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. O B. No. I would not be interested in making such an investment. The economy is most likely to sink into a depression. ○ C. Yes, I would be interested in making such an investment. The economy is most likely to begin a rapid expansion and recovery. Data table State of Economy Rapid expansion and recovery Probability 10% Fund Returns 100% Modest growth 30% 45% Continued recession 50% 20% Falls into depression 10% - 100% -
(Related to Checkpoint 8.2) (Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's 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 fund's 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 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. a. The expected rate of return from this investment opportunity is %. (Round to two decimal places) b. The investment's standard deviation is ☐ %. (Round to two decimal places) c. Would you be interested in making such an investment? (Select the best choice below.) A. 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. O B. No. I would not be interested in making such an investment. The economy is most likely to sink into a depression. ○ C. Yes, I would be interested in making such an investment. The economy is most likely to begin a rapid expansion and recovery. Data table State of Economy Rapid expansion and recovery Probability 10% Fund Returns 100% Modest growth 30% 45% Continued recession 50% 20% Falls into depression 10% - 100% -
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
Related questions
Question
quiz 8-2
Transcribed Image Text:(Related to Checkpoint 8.2) (Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's 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 fund's 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 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.
a. The expected rate of return from this investment opportunity is %. (Round to two decimal places)
b. The investment's standard deviation is ☐ %. (Round to two decimal places)
c. Would you be interested in making such an investment? (Select the best choice below.)
A. 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.
O B. No. I would not be interested in making such an investment. The economy is most likely to sink into a depression.
○ C. Yes, I would be interested in making such an investment. The economy is most likely to begin a rapid expansion and recovery.
Data table
State of Economy
Rapid expansion and recovery
Probability
10%
Fund Returns
100%
Modest growth
30%
45%
Continued recession
50%
20%
Falls into depression
10%
- 100%
-
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