Flirting with Risk

1240 words 5 pages
|Case 17: Flirting with Risk |
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Answers to Questions of Case 17

1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of individual stocks?

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Are these expectations realistic? Please explain.

Below is the table (Table 4) which includes the expected return and the standard deviations for equal investments in High-Tech and Counter-Cyclical stocks. Expected value is 0,0545 and the standard deviation is 0,0132. The risk level is less than the risk level of investing in only one of the two stocks ( See the excel file for standard deviations of non-diversified portfolio). The expected return is realistic since there is not much difference when compared with non-diversified investments’ expected returns. In other words the expected results are not very high which makes them realistic.

Table 4

9. What would happen if Mary were to put 70% of her portfolio in the High-Tech stock and 30% in the Index Fund? Would this combination be better for her? Explain.

According to Table 1 the expected return on the non-diversified investment to High-Tech stock is 0,05. When the portfolio is diversified as stated in the question, the expected return would be as seen in Table 5:

Table 5

The expected return on this diversified investment is 0,0527 which is less than the expected return from equal investments to High-Tech and Counter-Cyclical Companies since its expected return is shown in Table 4 as 0,0545. On the other hand the standard deviation of this investment is also higher than of the equal investments to High-Tech and Counter-Cyclical


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