# Financial MGT Problems

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1. (Expected rate of return and risk) B.J Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 3.8 percent. Calculate the investment’s expected return and its standard deviation should Gautney invest in this security?

 Probability Return 0.05 -5% 0.40 1% 0.50 5% 0.05 8%

1. The investments expected return is ……. %

1. (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 outcomes:

1. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?

2. Calculate the standard deviation in the anticipated returns found in part a .

3. 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

 State of Economy Probability Fund Returns Rapid expansion and recovery 5% 100% Modest growth 50% 30% Continued recession 40% 10% Falls into depression 5% -100%

1. The expected rate of return from this investment opportunity is ……. %

1. (Calculating 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 outcomes:

Data Table

 State of Economy Probability Fund Returns Rapid expansion and recovery 5% 100% Modest growth 50% 30% Continued recession 40% 10% Falls into depression 5% -100%

1. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?

2. Calculate the standard deviation in the anticipated return found in part a.

3. 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 enter into a rapid expansion

EXPECTED Rate of RETURN from this investment opportunity is =

• 5 years ago
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