You are considering the riskreturn profile of two funds for

You are considering the risk-return profile of two funds for investment. The relatively risky fund for investment. The relatively risky fund promises an expected return Calculate the probability of earning a negative return for each fund. (Round \"Z\" value to 2 decimal places and final answer to 4 decimal places.)

Solution

a-1.

For riskier fund:

We first get the z score for the critical value. As z = (x - u) / s, then as          
          
x = critical value =    0      
u = mean =    8      
          
s = standard deviation =    14      
          
Thus,          
          
z = (x - u) / s =    -0.571428571      
          
Thus, using a table/technology, the left tailed area of this is          
          
P(z <   -0.571428571   ) =    0.283854583 [ANSWER]

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For less risky fund:

We first get the z score for the critical value. As z = (x - u) / s, then as          
          
x = critical value =    0      
u = mean =    4      
          
s = standard deviation =    5      
          
Thus,          
          
z = (x - u) / s =    -0.8      
          
Thus, using a table/technology, the left tailed area of this is          
          
P(z <   -0.8   ) =    0.211855399 [ANSWER]

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a-2.

From part A, I will choose LESS RISKY FUND.

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b-1.

For riskier fund:

We first get the z score for the critical value. As z = (x - u) / s, then as          
          
x = critical value =    8      
u = mean =    8      
          
s = standard deviation =    14      
          
Thus,          
          
z = (x - u) / s =    0      
          
Thus, using a table/technology, the right tailed area of this is          
          
P(z >   0   ) =    0.5 [ANSWER]

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For less risky fund:

We first get the z score for the critical value. As z = (x - u) / s, then as          
          
x = critical value =    8      
u = mean =    4      
          
s = standard deviation =    5      
          
Thus,          
          
z = (x - u) / s =    0.8      
          
Thus, using a table/technology, the right tailed area of this is          
          
P(z >   0.8   ) =    0.211855399 [ANSWER]

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b-2.

From b-1, we choose RISKIER FUND. [ANSWER]