FINANCE Case 13- Mid-Atlantic Specialty , Inc.

CASE13QUESTIONS

MID-ATLANTICSPECIALTY,INC.

FinancialRisk

1.   Comparethe stand-alonerisk/returnofeachofthe fiveinvestmentalternativeslistedinExhibit13.1.

2.   MSIisconsideringtwoinvestmentstrategies:

-50percentinProjectAand50percentinProjectB(PortfolioA/B) or

-50percentinProjectAand50percentintheS&P500Fund(PortfolioA/S&P). Comparethe riskofthetwoportfolios.Whydoestheriskdiffer?

3.a.   b.Comparethe corporateriskofProjectsAandB.(Hint:UsetheexpectedreturnsinExhibit13.1to createagraphwithcorporatecharacteristiclinesforProjectsAand B.Regressionlinescanbe createdusingthe=INTERCEPTand=SLOPEfunctionsinExcel.TheXY(Scatter)chartinExcelis recommended.)Whatwouldhappento theoverallriskofMSIifitinvestsinProjectA?ProjectB?
 4. a.  b. c. Comparethe marketriskofa1-yearT-Bill,ProjectA,ProjectB,andequityinMSI.(Hint:Usethe historicalreturnsinExhibit13.2tocreateagraphwith marketcharacteristiclinesfora1-yearT-Bill, ProjectA,ProjectB,andequityinMSI.)Whatwouldhappento theoverallriskofawell-diversifiedportfoliowithaninvestmentina1-YearT-Bill?ProjectA?ProjectB?EquityinMSI?Whatdoesthedistancebetweenthemarketcharacteristicslineand theexpected returnofan investmentindicate?
 5. a.     b. Ifyouwereanindividualinvestorwithawell-diversifiedportfolio,whichinvestment(s)inExhibit13.1 wouldyoubuy?Why?(Inreality,MSIisanot-for-profitcorporation,soitwouldbeimpossible tobuy anequityinterestin thefirm.Forthisquestion,assumethatMSIisan investor-ownedcompany.) (Hint:constructaSecurityMarketLinegraphandplottheexpected returnofeachinvestmentonthegraph.)WhatdoesthedistancebetweentheSMLandtheexpectedreturnofaninvestmentindicate?
 6. a. b. c. Isthereturnontheone-yearT-billriskfree?SupposeMSIwantstoconstructaportfolioofstocksthathasanexpectedreturnequaltotherisk- freerate.Issuchaportfoliopossible?Issuchaportfoliolikely?Supposethatyouchoosetoholdasinglestockinvestmentinisolation.Would youbecompensated foralloftheriskthatyouassume?Explain.

7.   Inyouropinion,whatarethreekeylearningpointsfromthiscase?

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