## Question

###### You are considering the risk-return profile of two mutual funds for invastment. The relatively risky fund...

## Answers

Given:

Riskier fund:

Less Risky Fund:

a-1: Probability of earning a negative fund:

Riskier fund:P(X < 0) = P(Z < - 0.7551) =

0.2251(From standard normal table or using function NORMSDIST in Excel. Input in excel is)=NORMSDIST(-0.7551)

Less Risk fund:P(X < 0) = P(Z < - 0.6667) =

0.2525(From standard normal table or using function NORMSDIST in Excel. Input in excel is)=NORMSDIST(-0.6667)

a-2 To minimize the probability of earning negative returnRiskier fund has less probability (0.2251) compared to less risk fund (0.2525) for earning negative return. Therefore, choose

Riskier fund.

b-1 Probability of earning a return above 9.1%

Riskier fund:P(X > 9.1) = P(Z > - 0.1361) = 1 - P(Z < -0.1361) = 1 - 0.4459 = 0.5541 (From standard normal table or using function NORMSDIST in Excel. Input in excel is

)=NORMSDIST(-0.1361)

Less Risk fund:P(X > 9.1) = P(Z > 0.85) = 1 - P(Z < 0.85) = 1 - 0.8023 = 0.1977 (From standard normal table or using function NORMSDIST in Excel. Input in excel is

)=NORMSDIST(0.85)

b-2 To maximize the probability of earning a return above 9.1%Riskier fund has more probability (0.5541) compared to less risk fund (0.1977) for earning return above 9.1%. Therefore, choose

Riskier fund.

Final Answers:

a-1)

Riskier fund:0.2251

Less Risk fund:0.2525

a-2)Riskier fund

b-1)

Riskier fund:0.5541

Less Risk fund:0.1977

b-2)Riskier fund

Mean, μ 11.1%Standard Deviation, σ-14.7%Mean, μ =4%Standard Deviation. σ-6%μ 11.1, σ= 14.7We were unable to transcribe this imageWe were unable to transcribe this imageX-μ 0-4-4 一0.6667μ 11.1, σ= 14.7We were unable to transcribe this imageWe were unable to transcribe this imageWe were unable to transcribe this image