MERRILL 3-23 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 Market Portfolio Two-Stock Portfolio Collections 0.1 U.S. Rubber 3.5% (16.5) 3.0% (29.5%) 24.5% (19.5%) (2.5%) 0.2 3.0 (9.5) 10.5 (5.5) Recession Below average Average Above average Boom 0.4 3.0 12.5 (1.0) 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) 23.5 355 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 - -0.16 0.54 Sharpe ratio b -0.50 0.88 Mata they were held in 8. Suppose an investor starts with a portfolio consisting of one randomly selected stock. 1. What would happen to the riskiness and to the expected return of the portfolio as more randomly selected stocks were added to the portfolio? 2. What is the implication for investors? Draw a graph of the two portfolios to illustrate your