CASE13QUESTIONS
MID-ATLANTICSPECIALTY,INC.
FinancialRisk
1. Comparethe stand-alonerisk/returnofeachofthe fiveinvestmentalternativeslistedinExhibit13.1.
2. MSIisconsideringtwoinvestmentstrategies:
-50percentinProjectAand50percentinProjectB(PortfolioA/B) or
-50percentinProjectAand50percentintheS&P500Fund(PortfolioA/S&P). Comparethe riskofthetwoportfolios.Whydoestheriskdiffer?
| 3. | a. b. | Comparethe corporateriskofProjectsAandB.(Hint:UsetheexpectedreturnsinExhibit13.1to createagraphwithcorporatecharacteristiclinesforProjectsAand B.Regressionlinescanbe createdusingthe=INTERCEPTand=SLOPEfunctionsinExcel.TheXY(Scatter)chartinExcelis recommended.)Whatwouldhappento theoverallriskofMSIifitinvestsinProjectA?ProjectB? |
| 4. | a. b. c. | Comparethe marketriskofa1-yearT-Bill,ProjectA,ProjectB,andequityinMSI.(Hint:Usethe historicalreturnsinExhibit13.2tocreateagraphwith marketcharacteristiclinesfora1-yearT-Bill, ProjectA,ProjectB,andequityinMSI.)Whatwouldhappento theoverallriskofawell-diversifiedportfoliowithaninvestmentina1-YearT-Bill?ProjectA?ProjectB?EquityinMSI?Whatdoesthedistancebetweenthemarketcharacteristicslineand theexpected returnofan investmentindicate? |
| 5. | a. b. | Ifyouwereanindividualinvestorwithawell-diversifiedportfolio,whichinvestment(s)inExhibit13.1 wouldyoubuy?Why?(Inreality,MSIisanot-for-profitcorporation,soitwouldbeimpossible tobuy anequityinterestin thefirm.Forthisquestion,assumethatMSIisan investor-ownedcompany.) (Hint:constructaSecurityMarketLinegraphandplottheexpected returnofeachinvestmentonthegraph.)WhatdoesthedistancebetweentheSMLandtheexpectedreturnofaninvestmentindicate? |
| 6. | a. b. c. | Isthereturnontheone-yearT-billriskfree?SupposeMSIwantstoconstructaportfolioofstocksthathasanexpectedreturnequaltotherisk- freerate.Issuchaportfoliopossible?Issuchaportfoliolikely?Supposethatyouchoosetoholdasinglestockinvestmentinisolation.Would youbecompensated foralloftheriskthatyouassume?Explain. |
7. Inyouropinion,whatarethreekeylearningpointsfromthiscase?