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FINANCE Case 13- Mid-Atlantic Specialty, Inc.

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Question;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?

 

Paper#50204 | Written in 18-Jul-2015

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