You are considering two mutual funds for your investment. The possible returns for the funds are dependent

Question:

You are considering two mutual funds for your investment. The possible returns for the funds are dependent on the state of the economy and are given in the accompanying table.

State of the Economy Fund 1 Fund 2 Good 20% 40% Fair 10% 20% Poor -10% -40%

You believe that the likelihood is 20% that the economy will be good, 50% that it will be fair, and 30% that it will be poor.

a. Find the expected value and the standard deviation of returns for Fund 1.

b. Find the expected value and the standard deviation of returns for Fund 2.

c. Which fund will you pick if you are risk averse? Explain.

Mutual Funds
Mutual funds are like a pool of funds gathered by different small investors that have simalar investment perspective about returns on their investments. These funds are managed by professional investment managers who act smartly on behalf of the...