Risk and Return Example
There is a Minnesota Pharmaceuticals company that sent a product to be evaluated by the FDA. There are 5 outcomes; that it is approved, that it receives contingent approval, that it is sent back for more analysis of the data, that it is sent back to gather more data and do more analysis, or that it is rejected
The company is part of the S&P 1500. Thus S&P 1500 will move some based on these outcomes.
The riskless asset yields 1%
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Outcome Prob. MN Pharm S&P 1500
Failure 30% -12% -1.83%
Gather Data 25% -7% -1.02%
Analysis 20% 0% 7.95%
Contingent 20% 18% 9.21%
Approve 5% 110% 11.42%
all the answer in ecxcel sheet
requirement 1
Expected Return to MN Pharma? Expected Return to S&P 1500 Variance of MN Pharma Variance of S&P 1500 Covariance between the two Beta CAPM solution Is MN Pharma a good investment?
requirement 2
Further
Suppose you had a portfolio of 1/3 MN Pharma, 1/3 S&P 1500, and 1/3 the riskless asset. What is the expected return of the portfolio. What is the portfolio beta? If you disliked risk, is this better than investing only in the market? Explain. What is the expected return and beta if it is 50% MN Pharma and 25% each S&P 500 and riskless?
requirement 3
Calculate
Suppose Iowa Pharma has a beta of 1.3 and an expected return of 4.4% Is it a good investment The portfolio return and beta if you use ¼ MN Pharma, ¼ Iowa Pharma, ¼ Market and ¼ riskless Do the same for 1/3 for each company and 1/3 for the market (no riskless)