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You are on the board of the Springfield College Endowment Fund (SCEF), which is evaluating two potential managers for its investments: Mr. Monty Burns (MB) and Mr. Waylon Smithers (W S). The expected returns on portfolios MB and W S are 11% and 14%, respectively. The beta of MB is 0.8 while that of W S is 1.5. The T-Bill rate is 7%, while the expected return of the market index is 12%. The standard deviation of portfolio MB is 10%, while that of W S is 31%, and that of the index is 20%. 1. Suppose SCEF currently holds a market index portfolio. Based on the data, would you add portfolios MB and/or W S to SCEF’s mix of holdings? (Hint: check for under/overpricing.) 2. If SCEF were ordered to invest only in T-Bills and one of the portfolios MB or W S, which portfolio should SCEF invest? Why?

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Reid Wolff
Reid WolffLv2
28 Apr 2019

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Based on current dividend yields and expected capital gains, the expected rates of return on portfolios Aand B are 9.7% and 12.1%, respectively. The beta of A is .9, while that of B is 1.7. The T-bill rate is currently 5%, while the expected rate of return of the S&P 500 index is 10%. The standard deviation of portfolio A is 19% annually, while that of B is 40%, and that of the index is 29%.
a.

If you currently hold a market index portfolio, what would be the alpha for Portfolios A and B?(Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 1 decimal place.)
Portfolio A %
Portfolio B %
b-1.

If instead you could invest only in bills and one of these portfolios, calculate the sharpe measure for Portfolios A and B. (Round your answers to 2 decimal places.)
Sharpe Measure
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b-2. Which portfolio would you choose?
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After selling 12.75 million shares in Alibaba’s IPO founder Jack Ma received $867m which he wishes to invest wisely. He has contacted three young and very eager investment managers to research the market opportunities and propose an optimal investment portfolio. The best candidate will have the chance to become Ma’s wealth manager. Ma will not hire candidates that propose either inefficient or infeasible portfolios. Assume that all securities are priced according to the CAPM and that the risk free rate is 2%. The expected excess return on the market portfolio is 8% and the standard deviation is 20%. The three candidates proposed portfolios with the following characteristics: Expected Return Standard Deviation Candidate: Bo Expected Return: 8% Standard Deviation: 10% Candidate: Michael Expected Return: 12% Standard Deviation: 25% Candidate: Aditi Expected Return: 13% Standard Deviation: 30% 1. Who do you think will be hired by Ma and why? 2. How can the expected return of the wining portfolio be achieved? Specify the amount invested in each asset/portfolio of assets? 3. What is the beta of the winning portfolio? 4. If Ma holds his position for one year what is the total amount of money he expects to earn on his investment? Show all of your calculations and explain your approach.

What is the marginal impact on tax liability for a profitable corporation in the 20% marginal tax bracket that incurs an additional dollar of depreciation expense?

A decrease of 80 cents
An increase of 80 cents
An increase of 20 cents

A decrease of 20 cents.

Marshal Arts, President/CEO of Potato Corp. is paid an annual salary of $5 million and he also owns more than 30% of the company's shares. Having just won a big lottery, he is trying to decide whether to invest his new cash in Potato Corp., Safeway Groceries, T-bills, or S&P 500. Given what you know about the modern portfolio theory, the worst investment choice for Marshall is to invest in:

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Which of the following would be the BEST stock to be combined with Stock X if the objective was to minimize the portfolio’s risk?

A stock with a correlation coefficient of -.5 with X.
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A stock with a correlation coefficient of +.5 with X.

Portfolio A is poorly diversified and has a beta of .5. Portfolio B is fully diversified and has a beta of 1.5. Which of the following statements must be true about these portfolios?

A has more market risk than B.
A has less unique risk than B.
A has a lower required rate (opportunity cost) than B.

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Which of the following risks would be classified as a unique risk for an auto manufacturer?

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Interest rates

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Based only on the following rates of return for the past three years, which of the following is a correct estimate for Ralf Corp.'s beta?

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1 -0.20 +0.10
2 -0.10 +0.11
3 -0.00 +0.12
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b=0

Information: The following quote is from the 1996 Annual Report of Quaker Oats. "In 1996 we sold our Italian oils businesses and our frozen food businesses. These businesses were in mature categories and did not have the competitive scale to improve their low operating income margins." Most likely, Quaker management did extensive investment analyses of these divestiture decisions, including Net Present Value analyses, making decisions in the best interest of their shareholders." Here is the 1st question. Two more to follow.
Question: Given that the decision was made in the best interest of shareholders, what do you believe was the outcome of the NPV analyses undertaken by Quaker?

These business lines had positive NPVs.

These business lines had negative NPVs.

Same info as in last qt: The following quote is from the 1996 Annual Report of Quaker Oats. "In 1996 we sold our Italian oils businesses and our frozen food businesses. These businesses were in mature categories and did not have the competitive scale to improve their low operating income margins." Most likely, Quaker management did extensive investment analyses of these divestiture decisions, including Net Present Value analyses, making decisions in the best interest of their shareholders."
Here is another question: Were these businesses able to earn their required rate of return?

No, they did not. Otherwise, they would have had positive NPVs.
Yes, they did.

Cannot tell because the IRR is not given.

Same info as in previous qt: The following quote is from the 1996 Annual Report of Quaker Oats. "In 1996 we sold our Italian oils businesses and our frozen food businesses. These businesses were in mature categories and did not have the competitive scale to improve their low operating income margins." Most likely, Quaker management did extensive investment analyses of these divestiture decisions, including Net Present Value analyses, making decisions in the best interest of their shareholders. Question: What should have happened to the stock price of Quaker Oats when they announced they were divesting themselves of these business lines?

Most likely it went up especially if the announcement was unanticipated.

Most likely it went down because the announcement had to do with losing divisions.

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