Cases: Case Problem 4.1 Coates's Decision:
Questions: a. Assuming that investments A and B are equally risky and using the 4% discount rate, apply the present value technique to assess the acceptability of each investment and to determine the preferred investment. Explain your findings.
b. Recognizing that investment B is more risky than investment A, reassess the two alternatives, adding the 4% risk premium to the 4% discount rate for investment A and therefore applying a 8% discount rate to investment B. Compare your findings relative to acceptability and preference to those found for question a.
c. From your findings in questions a and b, indicate whether the IRR for investment A is above or below 4% and whether that for investment B is above or below 8%. Explain.
d. Use the present value technique to estimate the IRR on each investment. Compare your findings and contrast them with your response to question c.
e. From the information given, which, if either, of the two investments would you recommend that Dave make? Explain your answer.
f. Indicate to Dave how much money the extra $50 will have grown to by the end of 2026, assuming he makes no withdrawals from the savings account.
Case Problem 4.2 The Risk-Return Tradeoff: Molly O'Rourke's Stock Purchase Decision
Questions: a. Determine the HPR for each stock in each of the preceding 10 years. Find the expected return for each stock, using the approach specified by Molly.
b. Use the HPRs and expected return calculated in question a to find the standard deviation of the HPRs for each stock over the 10-year period.
c. Use your findings to evaluate and discuss the return and risk associated with stocks X and Y. Which stock seems preferable? Explain.
d. Ignoring her existing portfolio, what recommendations would you give Molly with regard to stocks X and Y?
Case Problem 5.1 Traditional Versus Modern Portfolio Theory: Who's Right?
Questions: a. Analyze Walt's argument and explain why a mutual fund investment may be overdiversified. Also explain why one does not necessarily have to have hundreds of thousands of dollars to diversify adequately.
b. Analyze Shane's argument and explain the major error in his logic relative to the use of beta as a substitute for diversification. Explain the key assumption underlying the use of beta as a risk measure.
c. Briefly describe the traditional approach to portfolio management and relate it to the approaches supported by Walt and Shane.
d. Briefly describe modern portfolio theory and relate it to the approaches supported by Walt and Shane. Be sure to mention diversifiable risk, undiversifiable risk, and total risk, along with the role of beta.
e. Explain how the traditional approach and modern portfolio theory can be blended into an approach to portfolio management that might prove useful to the individual investor. Relate this to reconciling Walt's and Shane's differing points of view.
Case Problem 5.2 Susan Lussier's Inherited Portfolio: Does It Meet Her Needs?
Questions: a. Briefly assess Susan's financial situation and develop a portfolio objective for her that is consistent with her needs.
b. Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the asset allocation scheme reflected in the portfolio. Comment on the risk, return, and tax implications of this portfolio.
c. If Susan decided to invest in a security portfolio consistent with her needs-indicated in response to question a-describe the nature and mix, if any, of securities you would recommend she purchase. Discuss the risk, return, and tax implications of such a portfolio.
d. From the response to question b, compare the nature of the security portfolio inherited by Susan with what you believe would be an appropriate security portfolio for her, based on the response to question c.
e. What recommendations would you give Susan about the inherited portfolio? Explain the steps she should take to adjust the portfolio to her needs.
Case Problem 5.2 Susan Lussier's Inherited Portfolio: Does It Meet Her Needs?
Questions: a. Briefly assess Susan's financial situation and develop a portfolio objective for her that is consistent with her needs.
b. Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the asset allocation scheme reflected in the portfolio. Comment on the risk, return, and tax implications of this portfolio.
c. If Susan decided to invest in a security portfolio consistent with her needs-indicated in response to question a-describe the nature and mix, if any, of securities you would recommend she purchase. Discuss the risk, return, and tax implications of such a portfolio.
d. From the response to question b, compare the nature of the security portfolio inherited by Susan with what you believe would be an appropriate security portfolio for her, based on the response to question c.
e. What recommendations would you give Susan about the inherited portfolio? Explain the steps she should take to adjust the portfolio to her needs.
Information related to above question is enclosed below:
Attachment:- Week2CaseProblems.rar