Mini Case
Chapter 6 Mini-Case: Risk, Return, and the Capital Assets Pricing Model
Review the mini-case in Chapter 6 of your text and respond to the following:
Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia Technologies. The two corporations have a correlation of -0.1789, and their expected returns and standard deviations are as follows:
|
Kalama Corp. |
Adelphia Technologies |
|
|
Expected return (%) |
14.86 |
23.11 |
|
Standard Deviation (%) |
23.36 |
31.89 |
- Calculate the frontier for all possible investment combinations of Kalama Corp. and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the optimal risky portfolio if the risk-free rate is 3%.
- Andrea has $50,000 and wants to earn a 19% expected return on her investment. Describe the optimal manner in which to structure her portfolio-both in dollar amounts and in weights relative to her $50,000-based on the preceding information.
- Andrea is also seriously considering buying some stock in Medford Barnett Corporation (MBC). The stock prices of MBC and the S&P for the past 25 months are tabulated below. Andrea estimates that MBC will earn a 14% return during the next year, and she expects the market to earn a 12% return during the same time period. In addition, she expects the relationship exhibited between the S&P and MBC to remain as it has in the past. Assuming that Andrea would be pulling MBC into a fully diversified portfolio, explain if buying the MBC shares a good decision.
|
Month |
S&P |
MBC |
|
1 |
1198.41 |
58.04 |
|
2 |
1228.81 |
65.36 |
|
3 |
1220.33 |
48.48 |
|
4 |
1234.18 |
53.32 |
|
5 |
1191.33 |
57.59 |
|
6 |
1191.50 |
49.23 |
|
7 |
1156.85 |
55.57 |
|
8 |
1180.59 |
50.99 |
|
9 |
1203.60 |
64.10 |
|
10 |
1181.27 |
50.45 |
|
11 |
1211.92 |
50.65 |
|
12 |
1173.82 |
51.23 |
|
13 |
1130.20 |
46.68 |
|
14 |
1114.58 |
51.09 |
|
15 |
1104.24 |
50.75 |
|
16 |
1101.72 |
59.80 |
|
17 |
1140.84 |
52.78 |
|
18 |
1120.68 |
49.22 |
|
19 |
1107.30 |
53.47 |
|
20 |
1126.21 |
49.26 |
|
21 |
1144.94 |
48.55 |
|
22 |
1131.13 |
61.32 |
|
23 |
1111.92 |
48.06 |
|
24 |
1058.20 |
58.88 |
|
25 |
1050.71 |
46.19 |
Remember to show all your work.
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