Mini Case

Chapter 6 Mini-Case: Risk, Return, and the Capital Assets Pricing Model

Review the mini-case in Chapter 6 of your text and respond to the following: ;
Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia Technologies. The two corporations have a correlation of -0.1789, and their expected returns and standard deviations are as follows:

1. Calculate the frontier for all possible investment combinations of Kalama Corp. and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the optimal risky portfolio if the risk-free rate is 3%.
2. Andrea has $50,000 and wants to earn a 19% expected return on her investment. Describe the optimal manner in which to structure her portfolio-both in dollar amounts and in weights relative to her $50,000-based on the preceding information.
3. Andrea is also seriously considering buying some stock in Medford Barnett Corporation (MBC). The stock prices of MBC and the S&P for the past 25 months are tabulated below. Andrea estimates that MBC will earn a 14% return during the next year, and she expects the market to earn a 12% return during the same time period. In addition, she expects the relationship exhibited between the S&P and MBC to remain as it has in the past. Assuming that Andrea would be pulling MBC into a fully diversified portfolio, explain if buying the MBC shares a good decision.

Remember to show all your work.