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 possible outcomes.
State of Economy Probability Fund Returns
Rapid Expansion recovery 15% 100%
Modest growth 50% 45%
Continued recession 20% 10%
Falls into depression 15% -100%(this is negative 100)
a. the expected rate of retune from this investment is
b. The investment standard deviation is
c. Would you be interested in making such an investment: Yes, NO or depends on your risk tolerance?