Reference no: EM131184724
Given the situation as described, answer the following questions.
1. Describe investment returns, and what "best case" and "worst case" returns you might hope to achieve for your new client. What is the return on an investment that costs $1,000 and is sold after one year for $1,100? Would you recommend this type of investment for your task at hand?
2. Explain why the Treasury bill's (aka, T-bill) return is independent of the state of the overall economy? Do T-bills promise a completely risk-free return? Provide your rationale.
3. Why are Alta Ind.'s returns expected to move with the economy whereas Repo Men's are expected to move counter to the economy?
4. Calculate the expected return (), the standard deviation (σp), and the coefficient of variation (CVp) for the portfolio profiled in Table 1. Provide your answers with calculations.
5. How does the risk of this two-stock portfolio compare with the risk of the individual stocks if those stocks were held in isolation? In what ways do "portfolio effects" impact how investors think about the risk of individual stocks?
6. If you decided to hold a simple one-stock portfolio, and consequently were exposed to more risk than diversified investors, could you expect to be compensated for all of your risk; that is, could you earn a risk premium on that part of your risk that you could have eliminated by diversifying? Explain.
7. Describe how market risk is measured for individual securities. How are beta coefficients calculated? Calculate beta using the following historical returns for the stock market and for another company, P.Q. Unlimited (PQU) as per Table 2 on the attached resource, "Topic 5 Assignment Graphic Tables." Note: Use the Excel formula function to calculate beta and interpret your results.
8. Write out the Security Market Line (SML) equation and use it to calculate the required rate of return on each alternative. Compare the expected rates of return with the required rates of return. How do these perform against your predictions?
9. Does the fact that Repo Men has an expected rate of return less than the T-bill rate of return make any sense? Why or why not?
10. What would be the market risk and the required return of a 50-50 portfolio of Alta Industries and Repo Men? Or of Alta Industries and American Foam? Based on your analysis and conclusions, which would you recommend to your client?
Attached is the Situation:
Attachment:- Situation.rar
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