1. Comparethe stand-alonerisk/returnofeachofthe fiveinvestmentalternativeslistedinExhibit13.1.
–50percentinProjectAand50percentintheS&P500Fund(PortfolioA/S&P). Comparethe riskofthetwoportfolios.Whydoestheriskdiffer?
Comparethe corporateriskofProjectsAandB.(Hint:UsetheexpectedreturnsinExhibit13.1to createagraphwithcorporatecharacteristiclinesforProjectsAand B.Regressionlinescanbe createdusingthe=INTERCEPTand=SLOPEfunctionsinExcel.TheXY(Scatter)chartinExcelis recommended.)
Comparethe marketriskofa1-yearT-Bill,ProjectA,ProjectB,andequityinMSI.(Hint:Usethe historicalreturnsinExhibit13.2tocreateagraphwith marketcharacteristiclinesfora1–yearT–Bill, ProjectA,ProjectB,andequityinMSI.)
Whatdoesthedistancebetweenthemarketcharacteristicslineand theexpected returnofan investmentindicate?
Ifyouwereanindividualinvestorwithawell–diversifiedportfolio,whichinvestment(s)inExhibit13.1 wouldyoubuy?Why?(Inreality,MSIisanot–for-profitcorporation,soitwouldbeimpossible tobuy anequityinterestin thefirm.Forthisquestion,assumethatMSIisan investor-ownedcompany.) (Hint:constructaSecurityMarketLinegraphandplottheexpected returnofeachinvestmenton
Supposethatyouchoosetoholdasinglestockinvestmentinisolation.Would youbecompensated foralloftheriskthatyouassume?Explain.
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