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.
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- Spring '08
- Dighe
- Finance
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