S5 w Risk and Return...Assignment III Q Search in Document Home Insert Draw Design Layout References Mailings Review View Table Design Layout + Share Calibri (Body) 11 A- A AS A A : 33 A+ 1 AaBbCcDdEe AaBbCcDdEe AaBbCcDc AaBbCcDdEe AaBbc AabbCedd Ee Ao Bb CcDdEe Subtle Emph... AaBbCcDdEe Emphasis Paste abe X2 x A ? Normal No Spacing Heading 1 Heading 2 Title Subtitle Styles Pane Question 1 Mini-Case Solace has been working for a year as an analyst for an investment company that specializes 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 2008, the market for certain types of securities based on real estate loans simply collapsed as the subprime mortgage scandal unfolded. Solace's firm, however, sees this market collapse as an opportunity to put together a fund that purchases some of these mortgage-backed securities, which investors have shunned, at bargain prices and holding them until the underlying mortgages are repaid or the market for these securities recovers. The investment company has begun putting together sales information concerning the new fund and has made the following predictions regarding its possible performance over the coming year as a function of how well the economy does: State of the Economy Rapid Expansion Modest growth No growth Recession Probability 10% 50% 40% 5% Fund Return 50% 35% 5% -100% Solace's boss has asked her to perform a preliminary analysis of the new fund's performance potential for the coming year. Specifically, he has asked that Solace address each of the following issues: a. What is the expected rate of return and standard deviation for the fund, given the estimates of fund performance in different states of the economy? b. What is the reward-to-risk ratio for the fund based on the fund's standard deviation as a measure of risk? c. In addition to the information provided, Solace has observed that the risk-free rate of interest for the coming year is 4.5 percent, the market risk premium is 5.5 percent, and the beta for the new investment is 3.55. What is the expected rate of return for the fund based on the CAPM? d. Based on your analysis, do you think that the proposed fund offers a fair return, given its risk? Explain. Page 1 of 2 758 words X English (United States) Accessibility: Investigate Focus Mode O Focus E + 150%