Mini Case: Risk, Return, and the Capital Assets Pricing Model
MINI CASE
Andrea Corbridge is considering forming a portfolio comprising of Kalama Corp. and Adelphia Technologies. The two corporations have a correlation of -0.1789, and their expected returns and stand deviations are as follows:
Kalama Corp. Adelphia Technologies
Expected return (%) 14.86 23.11
Standard deviation (%) 23.36 31.89
problem 1
a. Compute the frontier for all possible investment combinations of Kalama Corp. and Adelphia Technologies (from 0% to 100%, in 1% increments).
b. Find out the optimal risky portfolio if the risk-free rate is 3%.
problem 2
Andrea has $50,000 and wants to earn a 19% expected return on her investment.
a. What is the optimal manner in that to structure her portfolio both in dollars and in weights relative to her $50,000 based on the preceding information?
problem 3
Andrea is as well seriously considering buying some stock in Medford Barnett Corporation (MBC). The stock prices of MBC and the Standard & Poor (S&P) for the past 25 months are tabulated below. Andrea estimates that MBC will earn a 14% return throughout the next year, and she expects the market to earn a 12% return during the same time period. In addition, she anticipates the relationship exhibited between the S&P and MBC to remain as it has in the past.
a. Supposing that Andrea would be pulling MBC into a fully diversified portfolio, is buying the MBC shares a good decision?
Tabulated Table
Month S&P MBC
1 1,198.41 58.04
2 1,228.81 65.36
3 1,220.33 48.48
4 1,234.18 53.32
5 1,191.33 57.59
6 1,191.50 49.23
7 1,156.85 55.57
8 1,180.59 50.99
9 1,203.60 64.10
10 1,181.27 50.45
11 1,211.92 50.65
12 1,173.82 51.23
13 1,130.20 46.68
14 1,114.58 51.09
15 1,104.24 50.75
16 1,101.72 59.80
17 1,140.84 52.78
18 1,120.68 49.22
19 1,107.30 53.47
20 1,126.21 49.26
21 1,144.94 48.55
22 1,131.13 61.32
23 1,111.92 48.06
24 1,058.20 58.88
25 1,050.71 46.19