Homework answers / question archive / 1) Calculate the expected standard deviation on stock: State of the economy Probability of the state Percentage returns Economic recession 15% -5% Steady economic growth 38% 5% Boom Please calculate it 11% 2) James Fromholtz is considering whether to invest in a newly formed investment fund

1) Calculate the expected standard deviation on stock: State of the economy Probability of the state Percentage returns Economic recession 15% -5% Steady economic growth 38% 5% Boom Please calculate it 11% 2) James Fromholtz is considering whether to invest in a newly formed investment fund

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1) Calculate the expected standard deviation on stock:

State of the economy Probability of the state Percentage returns

Economic recession 15% -5%

Steady economic growth 38% 5%

Boom Please calculate it 11%

2) 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 retum from this investment opportunity?

b) Calculate the standard deviation in the anticipated retums 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. 

Data Table 
State of Economy                        Probability                   Fund Returns

Rapid expansion and recovery        5%                               100%

Modest growth                                 35%                              40%

Continued recession                        55%                              10%

Falls into depression                        5%                                -100%