8-23 RISK AND RETURN Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with Merrill Finch Inc., a large financial services corporation. Your first assign- ment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1-year holding period. Further, your boss has restricted you to the investment alternatives in the following table, shown with their probabilities and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in the blanks later.) Returns on Alternative Investments Estimated Rate of Return State of the Economy High Tech U.S. Rubber Market Portfolio Two-Stock Portfolio Probability T-Bills Collections Recession 0.1 3.0% (29.5%) 24.5% 3.5% (19.5%) (2.5%) 0.2 3.0 (9.5) 10.5 (16.5) (5.5) 0.4 3.0 12.5 (1.0) Below average Average Above average 0.5 7.5 5.8 0.2 3.0 27.5 (5.0) 38.5 22.5 0.1 3.0 42.5 (20.0) 23.5 Boom 35.5 11.3 1.2% 7.3% 8.0% 0.0 11.2 18.8 15.2 4.6 o 9.8 2.6 1.9 0.8 CV -0.16 0.54 Sharpe ratio -0.50 0.88 b f. Suppose you created a two-stock portfolio by investing $50,000 in High Tech and $50,000 in Collections 1. Calculate the expected return (f), the standard deviation (or), the coefficient of variation (CV). and the Sharpe ratio for this portfolio, and fill in the appropriate blanks in the table. 2. How does the riskiness of this two-stock portfolio compare with the riskiness of the individual stocks if they were held in isolation