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