FINANCE Case 13- Mid-Atlantic Specialty , Inc

CASE13QUESTIONS

 

 

MID-ATLANTICSPECIALTY,INC.

 

FinancialRisk

 

 

 

1.   Comparethe stand-alonerisk/returnofeachofthe fiveinvestmentalternativeslistedinExhibit13.1.

 

2.   MSIisconsideringtwoinvestmentstrategies:

-50percentinProjectAand50percentinProjectB(PortfolioA/B) or

-50percentinProjectAand50percentintheS&P500Fund(PortfolioA/S&P). Comparethe riskofthetwoportfolios.Whydoestheriskdiffer?

 

3. a.

 

 

 

b.

Comparethe corporateriskofProjectsAandB.(Hint:UsetheexpectedreturnsinExhibit13.1to createagraphwithcorporatecharacteristiclinesforProjectsAand B.Regressionlinescanbe createdusingthe=INTERCEPTand=SLOPEfunctionsinExcel.TheXY(Scatter)chartinExcelis recommended.)

Whatwouldhappento theoverallriskofMSIifitinvestsinProjectA?ProjectB?

 

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?

 

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?

 

6.

 

a. b.

 

c.

 

Isthereturnontheone-yearT-billriskfree?

SupposeMSIwantstoconstructaportfolioofstocksthathasanexpectedreturnequaltotherisk- freerate.Issuchaportfoliopossible?Issuchaportfoliolikely?

Supposethatyouchoosetoholdasinglestockinvestmentinisolation.Would youbecompensated foralloftheriskthatyouassume?Explain.

 

7.   Inyouropinion,whatarethreekeylearningpointsfromthiscase?

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