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.
Tutor Answer
Review from our student for this Answer
Brown University
1271 Tutors
California Institute of Technology
2131 Tutors
Carnegie Mellon University
982 Tutors
Columbia University
1256 Tutors
Dartmouth University
2113 Tutors
Emory University
2279 Tutors
Harvard University
599 Tutors
Massachusetts Institute of Technology
2319 Tutors
New York University
1645 Tutors
Notre Dam University
1911 Tutors
Oklahoma University
2122 Tutors
Pennsylvania State University
932 Tutors
Princeton University
1211 Tutors
Stanford University
983 Tutors
University of California
1282 Tutors
Oxford University
123 Tutors
Yale University
2325 Tutors