part f 1,2 Chapter 8 Risk and Rates of Return313a. Why is the T-bill's return independent of the state of the economy? Do T-bills promise a completelyrisk-free return? Explain.Why are High Tech's returns expected to move with the economy, whereas Collections'e areexpected to move counter to the economy?previous tableu should recognize that basing a decision solely on expected returns is appropriate only for risk-10 nal individuals. Because your client, like most people, is risk-averse, the riskiness of each alter-tative is an important aspect of the decision. One possible measure of risk is the standard deviationof returns.1 Calgulate this value for each alternative and fill in the blank on the row for o in the table.2. What type of risk is measured by the standard deviation?3 Draw a graph that shows roughly the shape of the probability distributions for High Tech, U.S.Rubber, and T-bills.å Suppose you suddenly remembered that the coefficient of variation (CV) is generally regarded asr a better measure of stand-alone risk than the standard deviation when the alternatives beingonsidered have widely differing expected returns. Calculate the missing CVs, and fill in the blanksn the row for CV in the table. Does the CV produce the same risk rankings as the standard devia-tion? Explain.Someone mentioned that you might also want to calculate the Sharpe ratio as a measure of stand-alone risk. Calculate the missing ratios and fill in the blanks on the row for the Sharpe ratio in thetable. Briefly explain what the Sharpe ratio actually measures.f Suppose you created a two-stock portfolio by investing $50,000 in High Tech and $50.000 inCollections.1. Calculate the expected return (f), the standard deviation (o), the coefficient of variation (CV,),and the Sharpe ratio for this portfolio, and fill in the appropriate blanks in the table.2 How doss the riskiness of this two-stock portfolio compare with the riskiness of the individualstocks if they were held in isolation?g. Suppose an investor starts with a portfolio consisting of ane randomly selected stock.1. What would happen to the riskiness and to the expected retum of the portfolio as more randomlyselected stocks were added to the portfolio?2 What is the implication for investors? Draw a graph of the two portfolios to illustrate youranswer.h 1. Should the effects of a portfolio impact the way investors think about the riskiness of individualstocks?2 If you decided to hold a one-stock portfolio (and consequently were exposed to more risk thandiversified investors), could you expect to be compensated for all of your risk; that is, could youearn a risk premium on the part of your risk that you could have eliminated by diversifying?1 The expected rates of retum and the beta coefficients of the alternatives supplied by an independen:analyst are as follows:Security1.31High Tech%6600 00.88Market7.3U.S. Rubber000(0.50)T-bills1.2Collections 百Bartman, of Stock A, of Stock B, and 20% of C.would the beta and return be?a job as a with a Your fRISK AND RETURN that you a major in just landeend of 1 you have been to plan for a bosslaassignment is to a client. the are to be in a aand (For now, the items at of you will fill itbarthe SML equationh If you formed a portfolio that consrestricted you to the in the with their probablitei an to stock in his portfolio.Reynolds, whatpue c86INTEGRATED CASEMERRILL FINCH INC.8-23a job as a financial planner with Merrill Finch Inc., a largearestrictednou,blanks later.)Returns on Alternative InvestmentsEstimated Rate of RetumU.S.RubberMarketState of theProbability T-BillsCollectionsPortfolioPortfolloAsOucog24.5%Recession0.1(29.5%)(195%)10.5(16.5)(5.5)(5)1250.20.43.00.57.5(0')Above average0.23.027.538.5225(O'S)0.142.523.535.5113woog3.0997.1.2%7.3%11218.815.2009.82.6Sharpe ratio-0.1650-0.500.881000131.00

Question

Accepted Answer

To Find:

Portfolio expected return
Standard deviation of portfolio
Sharpe ratio
CoV