1 Calculating alpha values explain if you agree or disagree
1. Calculating alpha values, explain if you agree or disagree with Bushkin’s selection.
2. Should the information Bart has heard about Alpha’s new product be a concern in his selection? Explain.
3. Assuming that Bart takes Bushkin’s advice, calculate the commission he will pay and compare this with the commission he probably would pay to a discount broker.
Bart Parks is a bachelor, 33 years old, with a good income and a reasonable net worth. Bart has about $20,000 invested in individual common stocks, most of them recommended by his broker, Buzz Bushkin. He’s done well with Bushkin over the years, and he is particularly pleased that Bushkin always gives him a list of several stocks to choose from, instead of just one. Bart has saved another $3,000 for the market and has asked Bushkin for a new list, which follows. Bushkin recommends Alpha Dynamics, but Bart is concerned with this selection because he has heard that Alpha’s latest product—an automatic envelope opener—has not met huge market acceptance. Bart has turned to you for help, and in response you have gathered the following data on expected returns and betas.
Bart doesn’t consider himself either excessively risk averting or risk seeking, but he does expect a return commensurate with the degree of risk inherent in a security. Also, Bart’s current holdings give him adequate diversification, so that need not concern him in selecting a stock now. Finally, Bart uses a market risk premium of 8 percent.
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