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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