1. Your client is concerned when you recommend two “risky” investments for his portfolio. “Look at the size of those standard deviations!”, he says. “One of those is risky enough, if I own them both, I’m taking on even more risk.” Explain why this may not be not the case. Under what circumstance would he be correct? Be sure to address the issue of covariance/correlation.
2. After your eloquent explanation, your client figured he’d read up on MPT. After learning about the Sharpe CAPM, he tells you he wants a high beta portfolio because that will get him more return. He says that Sharpe’s CAPM implies that more risk = more return. Is he right or wrong? Explain.
3. Discuss the advantages/disadvantages of relative valuation methods (Statistical metrics like price to book, sales and earnings) vs. using discounted intrinsic valuation methods like the dividend discount model or discounted cashflow model.