Acct

1.

(Expected rate of return and risk) B.J Gautney Enterprises is evaluating a security. One

-

year Treasur

y

bills are currently paying 4

.6

percent. Calculate the investment’s expected return and its standard

deviation should Gautney invest in this security?

a.

The

investments

expected return is ……. %

2.

(

Expected rate of return)

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

outcomes:

a.

Based on these potential outcomes, what is your estimate of the expected rate of return 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 or you double your money if the economy enters

into a rapid expansion

a.

The expected rate of return from this investment opportunity is

…

…

. %

State of Economy

Probability

Fund R

eturn

Rapid expansion and recovery

10

%

100%

Modest growth

35

%

4

0%

Continued recession

45

%

2

0%

Falls into depression

10

%

-

100%

3.

(Expected rate of return) 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

outcomes:

Data Table

Probability

Return

0.05

-

4

%

0.45

1

%

0.4

5

7

%

0.05

9

%

1. (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 investment’s expected return and its standard

deviation should Gautney invest in this security?

a. The investments expected return is ……. %

2. (Expected rate of return) 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 outcomes:

a. Based on these potential outcomes, what is your estimate of the expected rate of return 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 or you double your money if the economy enters

into a rapid expansion

a. 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%

3. (Expected rate of return) 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 outcomes:

Data Table

Probability Return

0.05 -4%

0.45 1%

0.45 7%

0.05 9%