Use the excel spreadsheet associated with this chapter in your response. Your response should have 500+ words, else it will receive no credit. The submission should be a single document that includes screenshots of your excel formulas/calculations.

1. Compare the stand-alone risk/expected return of each of the four investments and the S&P 500 listed in exhibit 12.1.

2. MSI is considering two investment strategies:- 50 percent in Healthcare Fund and 50 percent in Inverse ETF- 50 percent in Healthcare Fund and 50 percent in Biotech FundCompare the risk of the two portfolios. Why does the risk differ?

a. Use the historical returns in exhibit 12.2 to graph with market characteristic lines for a 1-year T-Bill, Healthcare Fund, Inverse ETF, and Biotech Fund. Compare the market risk of each of the four investments.

b. What would happen to the overall risk of a well-diversified portfolio with an investment in a 1-Year T-Bill? Healthcare Fund? Inverse ETF? Biotech Fund?

a. Construct a Security Market Line graph and plot the expected return of each investment on the graph.

b. If you were an individual investor with a well-diversified portfolio, which investment(s) in exhibit 12.1 would you buy? Why?

c. What does the distance between the Security Market Line and the expected return of an investment indicate?

 

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State of the Economy Poor Below average Average Above average Excellent Year Probability 1 2 3 4 5 1-Year T-Bill 0.1 0.2 0.4 0.2 0.1 7% 7% 7% 7% 7% Case 12: Mid-Atlantic Specialty, Inc. 1-Year Healthcare Inverse Bitoech T-Bill Fund ETF Fund 7% 7% 7% 7% 7% ETF: exchange-traded fund; S&P: Standard & Poor's; T-bill: Treasury bill Healthcare Fund -8% 2% -8% 2% 14% 25% 33% 14% 25% 33% Inverse ETF 18% 23% 7% -3% 2% 18% 23% 7% -3% 2% -19% 0% 13% 31% 50% Biotech Fund -19% 0% 13% 31% 50% S&P 500 -15% 0% 15% 30% 45% S&P 500 -15% 0% 15% 30% 45% ETF: exchange-traded fund; S&P: Standard & Poor's; T-bill: Treasury bill Note: These return distributions are fictitious and not meant to describe actual market conditions at the time you work this case. 85 EXHIBIT 12.1 Mid-Atlantic Specialty, Inc.: Estimated One-Year Return Distributions on Four Investments and the S&P 500 EXHIBIT 12.2 Mid-Atlantic Specialty, Inc.: Historical Return Distributions on Four Investments and the S&P 500 State of the Economy Poor Below average Average Above average Excellent Year Probability 1 2 3 4 5 1-Year T-Bill 0.1 0.2 0.4 0.2 0.1 7% 7% 7% 7% 7% Case 12: Mid-Atlantic Specialty, Inc. 1-Year Healthcare Inverse Bitoech T-Bill Fund ETF Fund 7% 7% 7% 7% 7% ETF: exchange-traded fund; S&P: Standard & Poor's; T-bill: Treasury bill Healthcare Fund -8% 2% -8% 2% 14% 25% 33% 14% 25% 33% Inverse ETF 18% 23% 7% -3% 2% 18% 23% 7% -3% 2% -19% 0% 13% 31% 50% Biotech Fund -19% 0% 13% 31% 50% S&P 500 -15% 0% 15% 30% 45% S&P 500 -15% 0% 15% 30% 45% ETF: exchange-traded fund; S&P: Standard & Poor's; T-bill: Treasury bill Note: These return distributions are fictitious and not meant to describe actual market conditions at the time you work this case. 85 EXHIBIT 12.1 Mid-Atlantic Specialty, Inc.: Estimated One-Year Return Distributions on Four Investments and the S&P 500 EXHIBIT 12.2 Mid-Atlantic Specialty, Inc.: Historical Return Distributions on Four Investments and the S&P 500

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