A Financial Analyst Considers Three Funds

question 23

Essay

A financial analyst considers three funds. The funds' estimated returns depend on future economic conditions - summarized by outcomes A, B, C, or D. The table lists the probabilities of these outcomes and each fund's expected return for each outcome.
(a) Which fund has the greatest expected monetary return?
(b) Comment on the appropriateness of the expected-value criterion.

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Definitions:

FIFO

First-In, First-Out, an accounting method where the oldest inventory items are recorded as sold first.

ROE

ROE, or Return on Equity, measures a corporation’s profitability by revealing how much profit it generates with the money shareholders have invested.

Investments

The act of allocating resources, usually money, with the expectation of generating an income or profit.

Compound Leverage Factor

A metric used to evaluate the effectiveness of using borrowed funds or financial derivatives to increase investment returns.