NO HANDWRITING PLEASE!
Suppose you created a two-stock portfolio by investing $50,000 in High Tech and $50,000 in Collections.
1.) Calculate the expected return, the standard deviation, the coefficient of varation, 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?
RRILL FINCH INC. RISK AND RETURN Assume that you recently graduated with a major in finance. You just lanc job as a financial planner with Merrill Finch Inc null Finch Inc., a large financial services corporation. Your first assin- 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: Vou will fill in the blanks later Returns on Alternative Investments Estimated Rate of Return Probability High Tech U.S. Rubber Market Portfolio Two-Stock Portfolio Collections T-Bills 3.0% 3.0 (29.5%) State of the Economy Recession Below average Average Above average Boom (2.596) 0.2 (95) 12.5 24.5% 10.5 (1.0) 3.5% (16.5) 0.5 5.8 (19.5%) (5.5) 7.5 22.5 35.5 8.09 (5.0) 38.5 0. 1 3 .0 42.5 (20.0) 23.5 1.2% 11.2 18.8 15.2 CV 9.8 2.6 Sharpe ratio -0.16 b -0.50 0.88 Note: "The estimated returns of U.S. 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 was 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 U.S. Rubber's stock price to be higher if there is a recession than if the economy is just below average. Merrill Finch's economic forecasting staff has developed probability estimates for the state of economy, and its security analysts developed a sophisticated computer program to estimate the of return on each alternative under each state of the economy. High Tech Inc. is an electronics fil Collections Inc. collects past-due debts, and U.S. Rubber manufactures tires and various other rub and plastics products. Merrill Finch also maintains a "market portfolio" that owns a market-weigh fraction of all publicly traded stocks: you can invest in that portfolio and thus obtain market results. Given the situation described, answer the following questions: the state of the economy? Do T-bills promise a c RRILL FINCH INC. RISK AND RETURN Assume that you recently graduated with a major in finance. You just lanc job as a financial planner with Merrill Finch Inc null Finch Inc., a large financial services corporation. Your first assin- 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: Vou will fill in the blanks later Returns on Alternative Investments Estimated Rate of Return Probability High Tech U.S. Rubber Market Portfolio Two-Stock Portfolio Collections T-Bills 3.0% 3.0 (29.5%) State of the Economy Recession Below average Average Above average Boom (2.596) 0.2 (95) 12.5 24.5% 10.5 (1.0) 3.5% (16.5) 0.5 5.8 (19.5%) (5.5) 7.5 22.5 35.5 8.09 (5.0) 38.5 0. 1 3 .0 42.5 (20.0) 23.5 1.2% 11.2 18.8 15.2 CV 9.8 2.6 Sharpe ratio -0.16 b -0.50 0.88 Note: "The estimated returns of U.S. 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 was 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 U.S. Rubber's stock price to be higher if there is a recession than if the economy is just below average. Merrill Finch's economic forecasting staff has developed probability estimates for the state of economy, and its security analysts developed a sophisticated computer program to estimate the of return on each alternative under each state of the economy. High Tech Inc. is an electronics fil Collections Inc. collects past-due debts, and U.S. Rubber manufactures tires and various other rub and plastics products. Merrill Finch also maintains a "market portfolio" that owns a market-weigh fraction of all publicly traded stocks: you can invest in that portfolio and thus obtain market results. Given the situation described, answer the following questions: the state of the economy? Do T-bills promise a c
