Q1. The infidelity mutual fund projects three possible outcomes for next year: weak performance (-5 percent), good performance (10 percent) and outstanding performance (30 percent). The good performance has a 50 percent chance of happening and is twice as
jsaibuQ1. The infidelity mutual fund projects three possible outcomes for next year: weak performance (-5 percent), good performance (10 percent) and outstanding performance (30 percent). The good performance has a 50 percent chance of happening and is twice as likely as the other outcomes. What is the expected value?
Q2. An investment has the following range of outcomes and probabilities:
Outcome Probability of outcomes
6% 0.20
9 0.60
12 0.20
Calculate the expected value and the standard deviation (round to two places after decimal point where necessary).
Q3. Compute the duration for the following data. Use a discount rate of 13 percent.
Year cash flow
1 $ 50
2 50
3 50
4 50
5 50
5 $1,000
b. Explain why the answer to part A is higher than the answer to problem 2.
c. if in part A the discount rate were 10 percent instead of 13 percent, would duration be longer or shorter? You do not need to actually compute a value; merely indicate an answer based on the discussion material in the text.
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