Peachtree Securities Case Essays

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Peachtree Securities Case

1. The return on a 1-year T-Bond is risk-free since it does not vary according to the state of the economy. The T-Bond return is independent of the state of the economy because the estimated return is 8% at all times. The only possible factor affecting a T-Bond may be inflation. 2. If we were only to consider the expected return, then the S&P 500 appears to be the best investments since it has the greatest expected return.

3. The standard deviation provides a measurement of the total risk by examining the tightness of the probability distribution associated with the different possible outcomes whereas the coefficient of variation measures risk per unit. The coefficient of variation is a
better
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Nevertheless, such reduction in diversification would make risk increase. The complete table “Risk and returns of portfolios” provides the different changes.

5. The portfolio between TECO – S&P 500 has an expected return of
14.3% and a standard deviation of 14.1%. In this portfolio the correlation is greater than the one in the other portfolio because the risk-reducing effect is much lower than the one in the portfolio TECO
– Gold Hill. (See all the possible combinations on TABLE 2).

6.

a) The portfolio’s risk would decrease if more stocks were. The correlation between stocks is also relevant.

b) I think investors consider the risk as a whole rather than by each. Nevertheless, if a big part of a portfolio is made up of a risky stock, it would make the portfolio more risky as a whole.

c) Total risk is made by Diversifiable (company-specific) risk and market (non-diversifiable) risk. Unique events to a particular firm cause the diversifiable risk while factors that affect all companies cause the market risk. The difference between diversifiable and market risk is that diversifiable risk can be reduced by diversifying whereas market risk can not be eliminated.

d) No, because the market compensates risk diversification if you don’t diversify is your fault and you should be willing to accept the risk. 7.
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