INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 8, Problem 3PS
Summary Introduction
To discuss: The affect of firm specific risk for which an investor would depart from indexed portfolio.
Introduction: An investor may invest in various stocks to reduce the risk of losses. Such a theory is called correlation theory. It is believed that an investor takes a lot of risk to achieve higher
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Please no spreadsheet workings.
Question 5 1
The common shares of Almond Beach Inc, have a beta of 0.75, offer a
return of 9%, and have an historical standard deviation of return of
17%. Alternatively, the common shares of Palm Beach Inc. have a beta
of 1.25, offer a return of 10%, and have an historical standard
deviation of return of 13%. Both firms have a marginal tax rate of
37%. The risk-free rate of return is 3% and the expected rate of
return on the market portfolio is 9½%%.
1. Which company would a well-diversified investor prefer to invest
in? Explain why and show all calculations.
2. Which company Would an investor who can invest in the shares of
only one firm prefer to invest in? Explain why.
Use the following template to organize and present your results:
Theoretical CAPM Actual offered
Almond Beach Inc.
Palm Beach Inc.
prediction for
expected return
(%)
return (%)
Standard
deviation of
return (%)
Beta
Comments on the diversified investor's
choice
Comments on the individual investor's
choice
solve this question by using appropriate methodology and true answer.
Chapter 8 Solutions
INVESTMENTS(LL)W/CONNECT
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