CASE13QUESTIONS
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FinancialRisk
1. Comparethe stand-alonerisk/returnofeachofthe fiveinvestmentalternativeslistedinExhibit13.1.
2. MSIisconsideringtwoinvestmentstrategies:
–50percentinProjectAand50percentinProjectB(PortfolioA/B) or
–50percentinProjectAand50percentintheS&P500Fund(PortfolioA/S&P). Comparethe riskofthetwoportfolios.Whydoestheriskdiffer?
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3. |
a.
b. |
Comparethe corporateriskofProjectsAandB.(Hint:UsetheexpectedreturnsinExhibit13.1to createagraphwithcorporatecharacteristiclinesforProjectsAand B.Regressionlinescanbe createdusingthe=INTERCEPTand=SLOPEfunctionsinExcel.TheXY(Scatter)chartinExcelis recommended.) Whatwouldhappento theoverallriskofMSIifitinvestsinProjectA?ProjectB? |
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4. |
a.
b. c. |
Comparethe marketriskofa1-yearT-Bill,ProjectA,ProjectB,andequityinMSI.(Hint:Usethe historicalreturnsinExhibit13.2tocreateagraphwith marketcharacteristiclinesfora1–yearT–Bill, ProjectA,ProjectB,andequityinMSI.) Whatwouldhappento theoverallriskofawell-diversifiedportfoliowithaninvestmentina1-Year T-Bill?ProjectA?ProjectB?EquityinMSI? Whatdoesthedistancebetweenthemarketcharacteristicslineand theexpected returnofan investmentindicate? |
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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 returnofeachinvestmenton thegraph.) WhatdoesthedistancebetweentheSMLandtheexpectedreturnofaninvestmentindicate? |
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6. |
a. b.
c. |
Isthereturnontheone–yearT-billriskfree? SupposeMSIwantstoconstructaportfolioofstocksthathasanexpectedreturnequaltotherisk- freerate.Issuchaportfoliopossible?Issuchaportfoliolikely? Supposethatyouchoosetoholdasinglestockinvestmentinisolation.Would youbecompensated foralloftheriskthatyouassume?Explain. |
7. Inyouropinion,whatarethreekeylearningpointsfromthiscase?
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