Define home mortgage securities

Assignment Help Financial Management

Reference no: EM13214977

James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the possible outcomes. James has estimate the expected rate of return from this investments is 20%. James wants to apply his recently acquired understanding of the security market line concept to his analysis.

State of Economy Probability Fund Returns

Rapid Expansion recovery 15% 100%

Modest growth 30% 40%

Continued recession 40% 20%

Falls into depression 15% -100%

a. If the risk-free rate of interest is currently 2.0% and the beta for the investment is 2.5, the slope of the security market line for the real estate mortgage security investment is _____% (Round to 2 decimal places).

b. James is also considering the investment of his money in a market index fund that has an expected rate of return of 9%. The slope of the security market line (i.e., the reward-to-risk ration) for this investment opportunity is ___%. (Round to 2 decimal places).
based on your analRound to 2 decimal places).

c. James is also considering the investment of his money in a market index fund that has an expected rate of return of 8%. The slope of the security market line (i.e., the reward-to-risk ration) for this investment opportunity is ___%. (Round to 2 decimal places).

d. Based on your analysis of parts a and b above, which investment should James take? Why?

Reference no: EM13214977

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