Harry Smith has been working for a year as an analyst for an investment company that specialises in serving very wealthy clients. These clients often purchase shares in closely held investment funds with very limited numbers of stockholders. In the fall of 2018 the market for certain types of securities based on real estate loans simply collapsed as recession unfolded. Harrys firm, however, sees this market collapse as an opportunity to put together a fund that purchases some of these mortgage-backed securities that investors have shunned by acquiring them at bargain prices and holding them until the underlying mortgages are repaid or the market for these securities recovers. The investment company began putting together sales information concerning the possible performance of the new fund and has made the following predictions regarding the possible performance of the new fund over the coming year as a function of how well the economy does:

State of the Economy Probability Fund Return

Rapid expansion 10% 50%

Modest growt 50% 35%

No growth 40% 5%

Recession 5% -100%

Harry Smiths boss has asked him to perform a preliminary analysis of the funds performance in the coming year. The following questions were asked:

Write answers to the following questions. a. Calculate the Expected Return and Standard Deviation of the fund given the data of the funds performance in different states of the economy.

b. What is the Reward to Risk ratio for the fund. c. In addition to the information provided Harry has observed the risk free rate of interest for the coming year is 4.5%, the market risk premium is 5.5% and Beta for the new investment is 3.55. Based on the above analysis do you think the proposed fund offers a fair return given its risk? Explain.{}