2. Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Merrill Finch inc.. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes. ESTIMATED RATE OF RETURN HIGH STATE OF THE U.S. ECONOMY PROB. T-BILLS RECESSION 0.2 1.0% BELOW AVG 0.2 1.0 AVERAGE 0.2 1.0 ABOVE AVG 0.2 1.0 BOOM 0.2 1.0 TECH -22.0% -2.0 20.0 35.0 50.0 COLLECTIONS RUBBER 28.0% 10.0%* 14.7 -10.0 0.0 -10.0 45.0 -20.0 30.0* MARKET PORTFOLIO -13.0% 1.0 15.0 29.0 43.0 7.0 Merrill Finch's economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts have developed a sophisticated computer program which was used to estimate the rate of return on each alternative under each state of the economy. Given the situation as described, answer the following questions. (8 pts) What is the required rate of return for a portfolio consisting 80 percent of U.S. Rubber and 20 percent of Collections? B. (2 pts) The expected rates of return of the alternatives as supplied by Merrill Finch's computer program are as follows: Security High Tech U.S. Rubber Expected Return 17.4% 13.8 T-bills Collections Is Collections stock under-or overvalued? Why? 8.0 1.7 bs Collections stock Collections