FINANCE Case 13- Mid-Atlantic Specialty , Inc.

FINANCE Case 13- Mid-Atlantic Specialty , Inc.

Question # 00022369 Posted By: spqr Updated on: 08/07/2014 01:57 PM Due on: 09/22/2014
Subject Business Topic General Business Tutorials:
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MID-ATLANTICSPECIALTY,INC.

FinancialRisk

1. Compare the stand-alone risk/return of each of the five investment alternatives listed in Exhibit13.1.

2. MSI is considering two investment strategies:

-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:UsethehistoricalreturnsinExhibit13.2tocreateagraphwith 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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