problem set 5

problem set 5 - Jason Rozenberg Problem set 5 1a) (.2*30) +...

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Jason Rozenberg Problem set 5 1a) (.2*30) + (.4*12.5) + (.4*-15) = 5% 1b) 12.5% 1c) (.20*-15) + (.4*0) + (.4*20) = 5% 1d) A risk-averse investor would be wise to own shares in both the Bad Living mutual fund and  in a general stock-market fund because he would be hedging his risk to capitalize profit.  By  investing in funds that invertly rise and fall he would minimize the risk in the worst case scenario  and still make profit on the other scenarios.  In this case, if the economy has high growth his  funds go up 30% and down 15%, leaving him with a profit of 15%.  If it has normal growth his  funds go up 12.5% and the other stays the same, and if there is a recession then one fund will  go down 15% and the other up 20% leaving him with a 5% profit.  This way there is a win-win  situation, even if the profits are smaller the possibillty of loss is eliminated. 1e) “The Bad Living mutual fund has a negative beta”defines the symetry of the fund growth 
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This note was uploaded on 04/08/2008 for the course ECO 340 taught by Professor Dighe during the Spring '08 term at SUNY Oswego.

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problem set 5 - Jason Rozenberg Problem set 5 1a) (.2*30) +...

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