James Fromholtz is considering whether to invest in a newly formed investment fund. Thefund's investment...
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James Fromholtz is considering whether to invest in a newly formed investment fund. Thefund'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 thefund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possibleoutcomes:
a.Based on these potentialoutcomes, what is your estimate of the expected rate of return from this investmentopportunity?
b.Would you be interested in making such aninvestment? 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.
| Month | Zemin Corp. | Market | ||
| 1 | 8 | % | 5 | % |
| 2 | 4 | 4 | ||
| 3 | 1 | 1 | ||
| 4 | 1 | 1 | ||
| 5 | 4 | 3 |
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