Case 1 Don Kraska, CFA, is preparing to answer a list of questions concerning stock valuation. These questions and answers were to serve as the outline for a presentation before a committee of officials from the Town of Webley. The committee needed advice on how best to follow the instructions in the will of James Lawrence, who had left the town 2,000 shares of Google stock, currently valued at approximately $1,250,000. Lawrence's will instructed the town to sell the Google shares and set up a diversified stock portfolio that would fund annual grants for youth groups in the town. During the course of Kraska's first presentation, Webley officials expressed a great deal of concern about the risks of the stock market, yet Lawrence's instructions were quite clear. The town was to invest the money in stocks, not bonds or certificates of deposit, and it could retain only limited amounts of cash for grant-making purposes. Kraska has set up a second meeting to discuss risk. He really wants this account, so he will try to strike the right tone and behave reassuringly, but still be realistic. He has been in the business since 1985, so he knows very well that the market has its ups and downs. Assume once again that you are Kraska preparing to answer a set of return- and risk-oriented questions that have surfaced as a result of the first presentation. Required: a) Explain how you could measure the returns on our portfolio? Assuming that a $1,000,000 portfolio in a given year earns $30,000 in dividends and either gains or loses $100,000 in market value. Show his computations. Be prepared to answer a follow-up question about the value of the portfolio after a 5% grant distribution. Kraska will also compute Lawrence's EAR on his investment in Google to illustrate a multiyear perspective. Lawrence purchased the Google stock for $200,000 and held it for three years before he died. b) Assess the risk of an individual stock such as Amazon.com and Coca-Cola using the following return data in Table 1.0 : Page 1 of 5 Table 1.0 c) Kraska will also suggest that it is good to assess risk by looking forward to how we expect stocks to react to a particular set of circumstances or "state of nature." Use the following set of assumptions for the coming year, compute the expected rate of return and the standard deviation for Amazon.com, Coca-Cola, and a portfolio with equal dollar amounts invested in Amazon.com and Coca-Cola (use Table 2)