Case 13: Southeastern Specialty, Inc.

15. Investment A has an expected return of $25 million and investment B has an expected return of $5 million. Market risk analysts believe the standard deviation of the return A is $10 million, and for B is $30 million (negative returns are possible here).

Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.

Government: Commonwealth, state and government trading enterprises D. Overseas—the rest of the world 6. The risk that impacts specifically on the share price of a particular company is called: A. economic risk B. business risk C. systematic risk D. unsystematic risk 7. When investors buy and sell shares based on receiving new information on shares and markets, this is known as: A. active investment B. a diversified strategy C. a market replication strategy D. passive investment 8. To track the S&P500, a fund manager can buy: A. all the stocks in the S&P500 B. an S&P500 index fund C. a percentage of stocks that essentially tracks the index D. All of the given answers. 9. The correlation of pairs of securities within a portfolio is called: A. co-association B. correspondence C. covariance D. variance 10. The correlation between two shares: A. can take on positive values

(a) Estimate the expected return and standard deviation for a portfolio that allocates 50% to stock #1

The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:

* The coefficient of variation is the standard deviation of a data set, divided by the mean of the same data set.

Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.

Why is T-bill’s return independent of the state of the economy? Do T-bill’s promise a completely risk-free return? Explain

In exhibit 9, it compares the returns of the Harvard Endowment to the Harvard Policy Portfolio, and to TUCS Median (Large funds (mostly pension funds). Overall the average annual differences in returns over the past 9 years between the Harvard Endowment and the TUCS Median have been 5.2%. This can further be broken down into excess returns due to asset allocation 2.2% and due to active stock selection 3.0%.

b. Plot the CAL along with a couple of indifference curves for the investor type identified above. c. Use Excel’s solver to maximize the investor’s utility and confirm that you get a 50% allocation in stocks. 3. You can invest in a risky asset with an expected rate of return of 20% per year and a standard deviation of 40% per year or a risk free asset earning 4% per year or a combination of the two. The borrowing rate is 9% per year. a. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which the allocation to this risky investment is 100%? b. Draw the Capital Allocation Line. Indicate the points corresponding to (i) 50% in the risk-less asset and 50% in the risky asset; and (ii) -50% in the riskless asset and 150% in the risky asset. c. Compute the expected rate of return and standard deviation for (i) and (ii). d. Suppose you have a target risk level of 50% per year. How would you construct a portfolio of the risky and the riskless asset to attain this target level of risk? What is the

Moreover, once SMB and HML are defined, the corresponding coefficients bs and bv are determined by linear regressions and can take negative values as well as positive values. The signs of the coefficients suggested that small cap and value portfolios have higher expected returns and arguably higher expected risk than those of large cap and growth portfolios.

When combined with portfolio, we see the variance has changed. Reynolds, which was more risky with higher variance individually, when combined with portfolio, has a lower variance than Hasbro.

In our study, we concentrated on the optimal portfolios, the one which has the lowest volatility or risk, for given level of return. The area below the frontier shows the achievable risk-return combinations, there will be at least one portfolio constructible that has the risk and return corresponding to that point. No portfolio on the efficient frontier can

According to the records from Bloomberg, it is common that the rate of return on a stock to vary over the course of time. Therefore, we normally prefer to base on average rate of return to calculate the expected return of these stocks. Also, standard deviation is widely used in evaluating the investment risk of assets. Those stocks that have higher standard deviations are more likely to be exposed to higher risk, vice versa.

From this chart, we can get that the investment return from 1955 to 1984 is stable, the return is not far from 0. However, after 1984, the return is more and more unstable, the amplitude of chart is bigger and bigger, which means investor will have a higher risk in this investment. They can earn a lot but they also can lose a lot. And until 2008, this trend