Assume a scenario where there are 3 funds and 4 states of the world. State 1,...

  

Transcribed Image Text:

Assume a scenario where there are 3 funds and 4 states of the world. State 1, 2, 3 and 4 have probabilities of 0.2, 0.3, 0.25, and 0.25 of happening respectively. The eturns for each fund and state are provided in the following table: State 1 State 2 State 3 State 4 7 4 3 12 6 -5 8 -2 6 Fund A1 Fund B 4 Fund C4 (a) Calculate the expected return and the risk for each fund. (b) Rank the funds to an investor with a utility function of U = R-0.50², where R is the expected return and o² is the variance. (c) Based on your results in part (b), what should be the additional premium on the second ranked fund to be as attractive as the first fund. (d) Based on the information provided in the table, can you identity an 'expansion' and a 'contraction' state? Justify your answer. Assume a scenario where there are 3 funds and 4 states of the world. State 1, 2, 3 and 4 have probabilities of 0.2, 0.3, 0.25, and 0.25 of happening respectively. The eturns for each fund and state are provided in the following table: State 1 State 2 State 3 State 4 7 4 3 12 6 -5 8 -2 6 Fund A1 Fund B 4 Fund C4 (a) Calculate the expected return and the risk for each fund. (b) Rank the funds to an investor with a utility function of U = R-0.50², where R is the expected return and o² is the variance. (c) Based on your results in part (b), what should be the additional premium on the second ranked fund to be as attractive as the first fund. (d) Based on the information provided in the table, can you identity an 'expansion' and a 'contraction' state? Justify your answer.

Answer rating: 100% (QA)

a Calculate the expected return and the risk for each fund Fund A Expected Return 02x7 03x4 025x3 02... View the full answer