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 assignment 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 Probability T-Bills High Tech Collections State of the Economy Market Portfolio Two-Stock Portfolio (2.5%) 3.0% 3.0 (29.5%) (9.5) 0.2 Recession Below average Average Above average Boom 3.0 5.8 12.5 27.5 U.S. Rubber 3.5% * (16.5) 0.5 38.5 23.5 7.3% 18.8 2.6 3.0 24.5% 10.5 (1.0) (5.0) (20.0) 1.2% 11.2 9.8 -0.16 -0.50 (19.5%) (5.5) 7.5 22.5 35.5 8.0% 15.2 42.5 11.3 1.9 CV Sharpe ratio 4.6 0.8 0.54 0.88 Merrill Finch's economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts developed a sophisticated computer program to estimate the rate of return on each alternative under each state of the economy. High Tech Inc. is an electronics firm, Collections Inc. collects past-due debts, and U.S. Rubber manufactures tires and various other rubber and plastics products. Merrill Finch also maintains a market portfolio that owns a market-weighted fraction of all publicly traded stocks: vou can invest in that portfolio and thus obtain average stock market results. b. Calculate the expected rate of return on each alternative, and fill in the blanks on the row for in the previous table. 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 assignment 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 Probability T-Bills High Tech Collections State of the Economy Market Portfolio Two-Stock Portfolio (2.5%) 3.0% 3.0 (29.5%) (9.5) 0.2 Recession Below average Average Above average Boom 3.0 5.8 12.5 27.5 U.S. Rubber 3.5% * (16.5) 0.5 38.5 23.5 7.3% 18.8 2.6 3.0 24.5% 10.5 (1.0) (5.0) (20.0) 1.2% 11.2 9.8 -0.16 -0.50 (19.5%) (5.5) 7.5 22.5 35.5 8.0% 15.2 42.5 11.3 1.9 CV Sharpe ratio 4.6 0.8 0.54 0.88 Merrill Finch's economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts developed a sophisticated computer program to estimate the rate of return on each alternative under each state of the economy. High Tech Inc. is an electronics firm, Collections Inc. collects past-due debts, and U.S. Rubber manufactures tires and various other rubber and plastics products. Merrill Finch also maintains a market portfolio that owns a market-weighted fraction of all publicly traded stocks: vou can invest in that portfolio and thus obtain average stock market results. b. Calculate the expected rate of return on each alternative, and fill in the blanks on the row for in the previous table
