Risk and Required Return
Case:
Alliance Health System Physician Group Practice Acquisition
1. Scenario.
Alliance Health System is considering acquiring a 50-physician multispecialty group practice located in its primary service area and wants to understand its corporate (portfolio) risk by identifying the return distributions for each.
2. Deliverables.
a. Given the economic state probabilities and rates of return in Table 1 below for both the acquisition and Alliance as a whole, calculate the following:
(1) Expected return
(2) Standard deviation
(3) Coefficient of variation
b. Should Alliance acquire the practice (justify your answer)?
3. Project Information.
Table 1. Probabilities of Occurrence and Rates of Return
|
Economic Condition
|
Probability of Occurrence
|
Rate of Return
|
|
Group Practice
|
Alliance
|
|
Very poor
|
0.10
|
-5.0%
|
-10.0%
|
|
Poor
|
0.15
|
5.0%
|
0.0%
|
|
Average
|
0.45
|
10.0%
|
10.0%
|
|
Good
|
0.25
|
15.0%
|
30.0%
|
|
Very good
|
0.05
|
25/0%
|
50.0%
|