Data table

​(Click on the following icon    in order to copy its contents into a​ spreadsheet.)

State of the Economy

Probability

Fund Returns

Rapid expansion and recovery

1010​%

100100​%

Modest growth

4040​%

4545​%

Continued recession

4545​%

1010​%

Falls into depression

55​%

negative 100−100​%​(Related to Checkpoint​ 8.1)**** ​(Computing the expected rate of​ return) Two recent graduates from business school

​(Mark VanMark Van

and

Sheila EppsSheila Epps​)

decided to set up an investment company to acquire home mortgages that are in default but that they hope to restructure in ways that make it possible for the homeowner to continue making payments and thus retain ownership of their home. To evaluate the feasibility of their investment​ strategy,

MarkMark

and

SheilaSheila

decided to evaluate their​ fund's performance under different economic conditions applied to the coming year.​ Specifically, they estimated their​ fund's performance for the next year under each of four states of the economy and estimated the probability of each state as shown in the popup​ window:

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.

a. Based on these potential​ outcomes, what is your estimate of the expected rate of return from this investment​ opportunity?

b. Would you be interested in making such an​ investment? Note that you lose all your money in one year if the economy collapses into the worst​ state, but you double your money if the economy enters into a rapid expansion.

​(Hint​:

Use at least four decimal places in all​ calculations.)

Question content area bottom

Part 1

a. The expected rate of return from this investment opportunity is

enter your response here​%.

​(Round to two decimal​ places)