Finance case 13- mid-atlantic specialty , inc.

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


2.   MSIisconsideringtwoinvestmentstrategies:

50percentinProjectAand50percentinProjectB(PortfolioA/B) or

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








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

Whatwouldhappento theoverallriskofMSIifitinvestsinProjectA?ProjectB?







b. c.


Comparethe marketriskofa1-yearT-Bill,ProjectA,ProjectB,andequityinMSI.(Hint:Usethe historicalreturnsinExhibit13.2tocreateagraphwith marketcharacteristiclinesfora1yearTBill, ProjectA,ProjectB,andequityinMSI.)

Whatwouldhappento theoverallriskofawell-diversifiedportfoliowithaninvestmentina1-Year


Whatdoesthedistancebetweenthemarketcharacteristicslineand theexpected returnofan investmentindicate?












Ifyouwereanindividualinvestorwithawelldiversifiedportfolio,whichinvestment(s)inExhibit13.1 wouldyoubuy?Why?(Inreality,MSIisanotfor-profitcorporation,soitwouldbeimpossible tobuy anequityinterestin thefirm.Forthisquestion,assumethatMSIisan investor-ownedcompany.) (Hint:constructaSecurityMarketLinegraphandplottheexpected returnofeachinvestmenton






a. b.





SupposeMSIwantstoconstructaportfolioofstocksthathasanexpectedreturnequaltotherisk- freerate.Issuchaportfoliopossible?Issuchaportfoliolikely?

Supposethatyouchoosetoholdasinglestockinvestmentinisolation.Would youbecompensated foralloftheriskthatyouassume?Explain.


7.   Inyouropinion,whatarethreekeylearningpointsfromthiscase?

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