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Question $39$

SchoolStreet most recently acquired an investment management firm UMB Advisor LLC$.$ Caleb just met one of the research analysts, Andy Iverson at UMB.

Andy was asked to conduct analysis on a number of healthcare stocks. After discussing his assignment with Caleb, Andy starts to analyze the risk and return parameters related to Obmcare, a small healthcare firm. After an in depth analysis of the firm and the economic outlook, Andy estimates the return probabilities and historical returns that are on the Exhibit $1$ and $2$ to quantify the risk$/$return relationship for Obmcare. During the four$-$year period, Obmcare$$s expected return was $8\mathrm{.}5$ percent.

Exhibit $-2$

Period

Return

$2011$

$0\mathrm{.}14$

$2010$

$-0\mathrm{.}08$

$2009$

$-0\mathrm{.}15$

$2008$

$0\mathrm{.}32$

Exhibit $-1$

Probability

Return

$30\%$

$-0\mathrm{.}05$

$50\%$

$0\mathrm{.}15$

$20\%$

$0\mathrm{.}25$

Exhibit $3$

HCA Health Corp.

HMA Heath, Inc.

Expected Return

$11\%$

$9\%$

Standard Deviation

$0\mathrm{.}22$

$0\mathrm{.}13$

Portfolio Asset Allocation

$65\%$

$35\%$

The correlation between HCA and HMA is $0\mathrm{.}25.$

Later on Andy moves on to create a two$-$stock portfolio for one of the clients who wants healthcare industry exposure. Exhibit $3$ lists the risk and return characteristics of two$-$stock, HCA Health Corp. and HMA Heath, Inc., portfolio.

Andy$$s final task for the assignment is to analyze two additional stocks, Delta Health and Canada Health The following data is available for the stocks: