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Additionally, alternative 2 provides the lowest coefficient of variation as well as the lowest standard deviation. The level of risk given the expected return is high and offers stability when compared to the other alternatives.
8-22
a. Stock B, stock A, stock C
b. If the market portfolio has a return of 12%, then stock a will realize a return of just below 12% or .096%. Stock b will have a return of 1.4 * 12% or .168%. Stock c will have a return of -.30 * 12% or -.036%
c. If the market portfolio has a negative return of 5%, then stock a will realize a return of -.04%. Stock b will realize a return of -.07%. Stock c will realize a return of -.015%
d. If the stock market were about to experience a decline, then the stock to add to the portfolio would be the stock with the lowest or negative beta, which is -.30 or stock c.
e. A major stock market rally would entail a pursuit of stock b, which has a beta of 1.40
9-4
Approximating the before-tax cost of debt - Rd =
I + 1,000 -- net proceeds from the sale of debt (bond)
n (# of years till bond maturity)
(net proceeds from the sale of debt) + 1,000
2
Bond A -- Bond E
9-13
WACC
The weighted average cost of capital
The Hi-Tech stock is highly volatile and will add a great degree of uncertainty and risk to the portfolio. Whether the stock should be added is a function of the current asset allocation, the investment horizon, the investment goal(s), and the level of risk the investor...
The coefficient of variation is greater than the range value and therefore the recommendation is to not include the stock in the portfolio. Additionally, the stock has had four years of strong growth and is likely to experience downside risk as a function of time (t).
References
SeekingAlpha (2009) "Russell 2000 Small Cap Stocks to Watch." http://seekingalpha.com/article/146488-russell-2000-s-small-cap-stocks-to-watch
7
Sheet1
Expected Return
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