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 Probability High Tech T-Bills Collections U.S. Rubber Market Portfolio Two-Stock Portfolio Recession 0.1 3.0% 24.5% 3.5% (29.5%) (9.5) (19.5%) (2.596) Below average 0.2 3.0 10.5 (16.5) (5.5) Average 0.4 3.0 12.5 0.5 7.5 5.8 Above average 0.2 3.0 27.5 (1.0) (5.0) (20.0) 38.5 22.5 Boom 0.1 3.0 42.5 23.5 35.5 11.3 1.2% 7.3% 8.0% o 0.0 11.2 18.8 15.2 4.6 CV 9.8 2.6 1.9 0.8 Sharpe ratio -0.16 0.54 b -0.50 0.88 b. Calculate the expected rate of return on each alternative, and fill in the blanks on the row for in the previous table. decision solely on cynected urne