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Merrill Finch. a. 1. The T-bill's return does not depend on the state of
the economy because the US Treasury must redeem the bills ...
Submitted by olmsies on February 1, 2008
Category: Miscellaneous
Words: 1201 | Pages: 5
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a. 1. The T-bill's return does not depend on the state of the economy because the U.S. Treasury must redeem the bills regardless of the state of the economy. T-Bills are not entirely riskless. This is because T-bills are comprised of real risk-free rate and an inflation premium. If the rate of inflation is greater than realized return of the T-bill, then one would actually lose money investing in a T-bill.
2. High Tech's returns are expected to move with the economy most likely because the company's sales are affected by the economy itselfwhen the economy is doing well, sales increase, which increases profits, etc. All of this ultimately affects a stock's return. Collections is negatively correlated to High Tech, so it is assumed that Collections will perform in the opposite direction that High Tech does.
b. Expected Rate of Return
T-Bills: 5.5%
High Tech: 12.4%
Collections: 1.0%
U.S. Rubber: 9.8%
Market Portfolio: 10.5%
2 Stock Portfolio: 4.2%
c. 1. Std. Deviation Calculations
T.Bills
5.5-5.5=0
High Tech
-27-12.4=-39.4=1552.36
-7-12.4=-19.4=376.36
15-12.4=2.6=6.76
30-12.4=17.6=309.76
45-12.4=32.6=1062.76
=Square root of 3308=57.5%
2-Stock Portfolio
0-4.2=-4.2=17.64
7.5-4.2=3.3=10.89
12-4.2=7.8=60.84
=Square root 89.37=9.45%
2. The standard deviation measures a security's stand-alone risk. Further, the standard deviation measures the
volatility of an investment. If an investment has a large standard deviation, than there is a high probability that
the actual realized return will not meet the expected return.
d. CV
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