Your investment strategy is to maximize expected return but with a risk level (standard deviation) that does not exceed 15%. Since you are a CAPM believer, you hold a combination of the market portfolio and risk free asset. The market expected return in 10% with a standard deviation of 20% and the risk free rate is 3%.
(A) What portfolio do you hold?
NASA has just announced that it not only found water on MARS but it also plans to open a resort on MARS named “MARS for Life”. NASA wishes to sell the new venture to investors in an initial public offering (IPO). An analyst estimates expected profits (Revenues – Expenses) would be $1B one year from now. The analysts mention that these are the expected profits and the risk (standard deviation) of this venture is 30% and the correlation with the market is 0.2. For simplicity we assume that this is a 1 year project where all revenues and expenses occur 1 year from now.
1. In the public offering NASA plans to sell 50M shares. What is the maximal share price at which you will invest in the new venture?
2. Suppose that the price for “MARS for Life” is lower than your answer in Q: 1. How would your answer to Part (A) change? What portfolio would you hold?