EXECUTIVE SUMMARYMerrill Finch Incorporated is a large financial services corporation. As a newly hired financial planner for the company, I have been assigned the task of investing $100,000 for a client. The investment alternatives have been restricted to five options: T-Bills, High Tech, Collections, U.S. Rubber, Market portfolio, and a 2-Stock portfolio.
The economic forecasting staff for Merrill Finch developed probability estimates for the state of the economy, and the security analysts have developed software to estimate the rate of return on each of these alternatives under each state of the economy. A chart showing the results of the analysis is in Appendix A of this report.
Section 1 of this report begins with a discussion on the concept of Return. The calculations of each of the alternatives expected rate of return are also calculated and discussed. Section 1 then continues with the concept of Risk. Three different measurements of risk are discussed and calculated for each of the investment alternatives.
The risk measurements discussed are the Standard Deviation, Coefficient of Variance, and Beta Coefficient.
Section 2 discusses some scenarios of different investment options. The first is of a 2-stock portfolio consisting of the investment of $50,000 into both High Tech and Collections. The expected return, standard deviation, and coefficient of variance are then calculated and discussed for this option. The second scenario is of a portfolio consisting of randomly selected stocks. The section concludes with a discussion of the risk involved with this random portfolio and how the addition of more random stocks to the portfolio would affect the risk.
Section 3 discusses the Security Market Line (SML) Equation and how the SML would be affected if inflation expectations were to rise by 3 percentage points. Appendix B shows this equation and its use to calculate...