Minicase
MiniCase 3.
1. What is the expected rate of return and standard deviation for the fund, given the estimates of fund performance in different states of the economy?
|
|
a |
b |
|
State of the economy |
Probability |
Return |
|
Rapid Expansion |
0.1 |
50% |
|
Modest Growth |
0.5 |
35% |
|
No Growth |
0.4 |
5% |
|
Recession |
0.05 |
-100% |
2. What is the reward-to-risk ratio for the fund based on the fund’s standard deviation as a measure of risk?
3. What is the expected rate of return for the fund based on the capital asset pricing model (CAPM)?
4. In addition to the information provided, you have observed that the risk-free rate of interest for the coming year is 4.5%, the market risk premium is 5.5%, and the beta for the new investment is 3.55. Based on your analysis, do you think that the proposed fund offers a fair return, given its risk? Explain.