04 Jun CALCULATE THE FRONTIER FOR ALL POSSIBLE INVESTMENT COMBINATIONS OF KALAMA CORP. AND ADELPHIA TECHNOLOGIES (FROM 0% TO 100%, IN 1% INCREMENTS)
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:
*MUST SHOW ALL WORK*
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
1. 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%.
2. 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.
3. 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 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
Graham, John; Smart, Scott B.; Megginson, William L (2009-09-28). Corporate Finance: Linking Theory to What Companies Do (Available Titles CourseMate) (Page 227). Cengage Textbook. Kindle Edition.
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