Table 2 Returns on Portfolios Portfolio Long-Run State of the Economy Prob. 50% CPC 50% Morely 40% CPC 60% EAT 50% Morely 50% EAT Recession 0.10 15.00% 2.50% Below avg. 0.20 6.80 4.00 Average 0.40 10.40 8.00 Above avg. 0.20 22.40 9.50 Boom 0.10 32.00 9.50 Expected return 8.98% 7.10% Variance 197.1 6.1 Std deviation 14.04% 2.47% Coef of var (CV) 1.56 0.35 Questions 1. Calculate the expected rate of return for each of the financial assets listed in Table 1, and complete the expected return row for Table 1. Based solely on the expected returns, which of the investments appears the best and worst? Discuss the impact on returns for general changes in the economy for CPC, Morely, and EAT. 2. Considering U.S. Treasuries are guaranteed by the U.S. government, answer the following questions. a. Is the T bill return independent of the state of the economy? Briefly explain. Do T bills promise completely risk free returns? Explain. b. Why do T bond returns vary? Why are T bond returns high when the market returns are low? c. How would returns on corporate bonds that Filmore Enterprises might issue compare with those for T-bonds? Would your answer be dependent on the potential bond rating of Filmore Enterprises? 3. Basing a decision solely on expected returns is appropriate only for risk-neutral individuals. Since most people are risk averse, risk is an important consideration for the decision. a. Two possible measures of risk are the standard deviation and the coefficient of variation. Calculate the standard deviation and coefficient of variation for CPC returns and complete the related blanks in Table 1. b. Compare the risk and expected return relationships among all six assets listed in Table 1. Explain the apparent discrepancies with the normal risk and return tradeoff.