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:
|
|
Kalama Corp.
|
Adelphia Technologies
|
|
Expected return (%)
|
14.86
|
23.11
|
|
Standard Deviation (%)
|
23.36
|
31.89
|
- 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%.
- Andrea has $50,000 and wants to earn a 19% expected return on her investment. What is 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?
- 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, is buying the MBC shares a good decision?
|
Month
|
S&P
|
MBC
|
|
1
|
1198.41
|
58.04
|
|
2
|
1228.81
|
65.36
|
|
3
|
1220.33
|
48.48
|
|
4
|
1234.18
|
53.32
|
|
5
|
1191.33
|
57.59
|
|
6
|
1191.50
|
49.23
|
|
7
|
1156.85
|
55.57
|
|
8
|
1180.59
|
50.99
|
|
9
|
1203.60
|
64.10
|
|
10
|
1181.27
|
50.45
|
|
11
|
1211.92
|
50.65
|
|
12
|
1173.82
|
51.23
|
|
13
|
1130.20
|
46.68
|
|
14
|
1114.58
|
51.09
|
|
15
|
1104.24
|
50.75
|
|
16
|
1101.72
|
59.80
|
|
17
|
1140.84
|
52.78
|
|
18
|
1120.68
|
49.22
|
|
19
|
1107.30
|
53.47
|
|
20
|
1126.21
|
49.26
|
|
21
|
1144.94
|
48.55
|
|
22
|
1131.13
|
61.32
|
|
23
|
1111.92
|
48.06
|
|
24
|
1058.20
|
58.88
|
|
25
|
1050.71
|
46.19
|