Case 2.1-Risk and Return (20 points) Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the client plans to invest in a business at the end of year 1, you have been instructed to plan for a 1-year holding period. Furthermore, your boss has restricted you to investment alternatives in the following table, shown with their probabilities and associated outcomes 2-Stock Market Portfolio [HT Probability TBills High Tech Collections US Rubber Portfolio and Coll) 10% 20% 40% 20% 10% SS% 5.5% 5.5% 5.5% 55% 27.0% 1S0% 45.0% 27% % 0% -11% -21% 6% -34% 3% 41% 25% -17% 10% 38% Below Average 7.5% Above Average Boom Expected return Expected Sed Dev 08788 Note that the estimated returns of US Rubber do not always move in the same direction as the overall economy. For example, when the economy is below average, consumers purchase fewer tires than they would if the economy were stronger. However, if the economy is in a flat-out recession, a large number of consumers who were planning to purchase a new car may choose to wait and instead purchase new tires for the car they currently own. Under these circumstances, we would expect US Rubbers stock price to be higher if there was a recession than if the economy was just below average. The investment advisory'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 is used to estimate the rate of return on each alternative under each state of the economy .High Tech is an electronics firm Collections Inc. collects past due debts and US Rubber manufactures tires and various other rubber and plastic products The advisory also maintains a 'market portfolio' that owns a market-weighted fraction of all publicly traded stocks; you can invest in that portfolio and thus obtain average stock market results. Given this information, answer the following questions Case 2.1-Risk and Return (20 points) Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the client plans to invest in a business at the end of year 1, you have been instructed to plan for a 1-year holding period. Furthermore, your boss has restricted you to investment alternatives in the following table, shown with their probabilities and associated outcomes 2-Stock Market Portfolio [HT Probability TBills High Tech Collections US Rubber Portfolio and Coll) 10% 20% 40% 20% 10% SS% 5.5% 5.5% 5.5% 55% 27.0% 1S0% 45.0% 27% % 0% -11% -21% 6% -34% 3% 41% 25% -17% 10% 38% Below Average 7.5% Above Average Boom Expected return Expected Sed Dev 08788 Note that the estimated returns of US Rubber do not always move in the same direction as the overall economy. For example, when the economy is below average, consumers purchase fewer tires than they would if the economy were stronger. However, if the economy is in a flat-out recession, a large number of consumers who were planning to purchase a new car may choose to wait and instead purchase new tires for the car they currently own. Under these circumstances, we would expect US Rubbers stock price to be higher if there was a recession than if the economy was just below average. The investment advisory'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 is used to estimate the rate of return on each alternative under each state of the economy .High Tech is an electronics firm Collections Inc. collects past due debts and US Rubber manufactures tires and various other rubber and plastic products The advisory also maintains a 'market portfolio' that owns a market-weighted fraction of all publicly traded stocks; you can invest in that portfolio and thus obtain average stock market results. Given this information, answer the following questions