(Expected rate of return) Robert Gage 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 Robert that the fund’s performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes:
State of the economy / Probability / Fund return
Rapid expansion and recovery 5% 100$
Modest growth 45% 35%
Continued recession 45% 5%
Falls into depression 5% -100%
· Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
Calculate the standard deviation
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