18 Jan

Compare the market risk of a 1-year T-Bill, Project A, Project B

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Question: Compare the market risk of a 1-year T-Bill, Project A, Project B…

  1. Compare the market risk of a 1-year T-Bill, Project A, Project B, and equity in MSI. (Hint: Use the historical returns in Exhibit 13.2 to create a graph with market characteristic lines for a 1-year T-Bill, Project A, Project B, and equity in MSI.)
  2. What would happen to the overall risk of a well-diversified portfolio with an investment in a 1-Year T-Bill? Project A? Project B? Equity in MSI?
  3. What does the distance between the market characteristics line and the expected return of an investment indicate?                                              Investment

——————————————————————————————–

1-year                                                        S&P 500  Equity in

                                                T-Bill      Project A             Project B              Fund                      MSI

Year 1                                        7%            -8%                    18%                 -15%                   0%

Year 2                                        7%             2%                     23%                  0%                    5%

Year 3                                        7%             14%                   7%                    15%                   10%

Year 2                                        7%             25%                   -3%                   30%                   15%

Year 5                                        7%             33%                    2%                    45%                  20%

Note: these return distributions are fictitious and not mean to describe actual market conditions at the time you work this case.

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