RISK

4. MAXIMIZE RETURN/MINIMIZE

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

fund promises an expected return of 8% with a standard deviation of 14%. The relatively less risky

fund promises an expected return of 4% with a standard deviation of 5%. Assume that the returns

are approximately normally distributes.

a) Which mutual fund you will pick if your objective is to minimize the probability of earning a

negative return?

b) Which mutual fund will you pick if your objective is to maximize the probability of earning a

return above 8%?