FINANCE 650 - You have recently graduated

FINANCE 650 - You have recently graduated  

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 You have recently graduated with a major in finance and landed a financial planner job with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client.

· Because the funds will be invested in a new business the client plans to start at the end of the year, you have been instructed to plan for a 1-year holding period. Further, your boss has restricted you to the investment alternatives shown in Table 1 on the attached resource, "Topic 5 Assignment Graphic Tables." (Disregard for now the items at the bottom of the data; you will fill in the blanks later.)

· Note that the estimated returns of American Foam (Am. Foam), a bedding company, do not always move in the same direction as the overall economy.

· For example, when the economy is below average, consumers purchase fewer mattresses than they would if the economy were stronger.

· However, if the economy is in a flat-out recession, a large number of consumers who were planning to purchase a more expensive inner-spring mattress may purchase a cheaper foam mattress instead. Under these circumstances, we would expect American Foam’s stock price to be higher if there is a recession than if the economy was just below average.

· Barney Smith’s economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts have developed a sophisticated computer program that was used to estimate the rate of return on each alternative under several state of the economy scenarios.

· Alta Industries (Alta Inds) is an electronics firm; Repo Men collects past-due debts; and American Foam, as per above, manufactures mattresses and various other foam products. Barney Smith also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund, and thus obtain average stock market results.

Given the situation as described, answer the following questions.

1 Describe investment returns, and what "best case" and "worst case" returns you might hope to achieve for your new client. What is the return on an investment that costs $1,000 and is sold after one year for $1,100? Would you recommend this type of investment for your task at hand?

2 Explain why the Treasury bill's (aka, T-bill) return is independent of the state of the overall economy? Do T-bills promise a completely risk-free return? Provide your rationale.

3 Why are Alta Ind.’s returns expected to move with the economy whereas Repo Men’s are expected to move counter to the economy?

4 Calculate the expected return (), the standard deviation (?_p), and the coefficient of variation (CV_p) for the portfolio profiled in Table 1. Provide your answers with calculations.

5 How does the risk of this two-stock portfolio compare with the risk of the individual stocks if those stocks were held in isolation? In what ways do "portfolio effects" impact how investors think about the risk of individual stocks?

6 If you decided to hold a simple one-stock portfolio, and consequently were exposed to more risk than diversified investors, could you expect to be compensated for all of your risk; that is, could you earn a risk premium on that part of your risk that you could have eliminated by diversifying? Explain.

7 Describe how market risk is measured for individual securities. How are beta coefficients calculated? Calculate beta using the following historical returns for the stock market and for another company, P.Q. Unlimited (PQU) as per Table 2 on the attached resource, "Topic 5 Assignment Graphic Tables."Note: Use the Excel formula function to calculate beta and interpret your results.

8 Write out the Security Market Line (SML) equation and use it to calculate the required rate of return on each alternative. Compare the expected rates of return with the required rates of return. How do these perform against your predictions?

9 Does the fact that Repo Men has an expected rate of return less than the T-bill rate of return make any sense? Why or why not?

10 What would be the market risk and the required return of a 50-50 portfolio of Alta Industries and Repo Men? Or of Alta Industries and American Foam? Based on your analysis and conclusions, which would you recommend to your client?

Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

Case Study: Risk and Return

	1 Unsatisfactory 0.00%	2 Less than Satisfactory 74.00%	3 Satisfactory 79.00%	4 Good 87.00%	5 Excellent 100.00%
70.0 % Content
7.0 % Describes investment returns and incorporates an investment scenario with recommendations.	Not included.	A description of investment returns and/or an investment scenario with recommendations is present, but the information provided is incomplete, inaccurate, or otherwise deficient.	A description of investment returns and an investment scenario with recommendations is incorporated, but minimal detail or support is provided for one or more components.	A description of investment returns and an investment scenario with recommendations is present, and is incorporated in full. The submission encompasses essential details and provides appropriate support.	A description of investment returns and an investment scenario with recommendations is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Explains Treasury bills and their return on investment characteristics.	Not included.	An explanation of Treasury bills and their return on investment characteristics is incorporated, but the information provided is incomplete, inaccurate, or otherwise deficient.	An explanation of Treasury bills and their return on investment characteristics is incorporated, but minimal detail or support is provided for one or more components.	An explanation of Treasury bills and their return on investment characteristics is present, and is incorporated in full. The submission encompasses essential details and provides appropriate support.	An explanation of Treasury bills and their return on investment characteristics is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Explains how returns can move with, or counter to, the economy.	Not included.	An explanation how returns can move with, or counter to, the economy is incorporated, but the information provided is incomplete, inaccurate, or otherwise deficient.	A description of an asset An explanation how returns can move with, or counter to, the economy is incorporated, but minimal detail or support is provided for one or more components.	An explanation how returns can move with, or counter to, the economy is present, and is incorporated in full. The submission encompasses essential details and provides appropriate support.	An explanation how returns can move with, or counter to, the economy is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Provides expected return, standard deviation, and coefficient of variation calculations for the prescribed portfolio scenario.	Not included.	Submission provides expected return, or standard deviation, or coefficient of variation calculations for the prescribed portfolio scenario, or a combination of two of these only. The information provided is incomplete, inaccurate, or otherwise deficient.	Submission provides expected return, standard deviation, and coefficient of variation calculations for the prescribed portfolio scenario, but minimal detail or support is provided for one or more components.	Submission provides expected return, standard deviation, and coefficient of variation calculations for the prescribed portfolio scenario in full. The submission encompasses essential details and provides appropriate support.	Submission provides expected return, standard deviation, and coefficient of variation calculations for the prescribed portfolio scenario comprehensively. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Discusses stock portfolio risks and the impact of portfolio effects on investing decisions.	Not included.	A discussion of stock portfolio risks and the impact of portfolio effects on investing decisions is present, but the information provided is incomplete, inaccurate, or otherwise deficient.	A discussion of stock portfolio risks and the impact of portfolio effects on investing decisions is incorporated. Minimal detail or support is provided for one or more components.	A discussion of stock portfolio risks and the impact of portfolio effects on investing decisions is present and incorporated in full. The submission encompasses essential details and provides appropriate support.	A discussion of stock portfolio risks and the impact of portfolio effects on investing decisions is present, and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Discusses risk premium and the relationship to portfolio diversification.	Not included.	A discussion of risk premium and the relationship to portfolio diversification is incorporated, but the information provided is incomplete, inaccurate, or otherwise deficient.	A discussion of risk premium and the relationship to portfolio diversification is incorporated, but minimal detail or support is provided for one or more components.	A discussion of risk premium and the relationship to portfolio diversification is present, and is incorporated in full. The submission encompasses essential details and provides appropriate support.	A discussion of risk premium and the relationship to portfolio diversification is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Discusses how market risk is measured for individual securities, inclusive of beta coefficients.	Not included.	A discussion of how market risk is measured for individual securities, inclusive of beta coefficients is incorporated, but the information provided is incomplete, inaccurate, or otherwise deficient.	A discussion of how market risk is measured for individual securities, inclusive of beta coefficients is incorporated, but minimal detail or support is provided for one or more components.	A discussion of how market risk is measured for individual securities, inclusive of beta coefficients is present, and is incorporated in full. The submission encompasses essential details and provides appropriate support.	A discussion of how market risk is measured for individual securities, inclusive of beta coefficients is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Provides calculations for, and discussion of, expected and required rates of return for case scenarios using the Security Market Line (SML) equation.	Not included.	Submission includes calculations for, and/or discussion of expected and required rates of return, for case scenarios using the Security Market Line (SML) equation. However, the information provided is incomplete, inaccurate, or otherwise deficient.	Submission includes calculations for, and discussion of expected and required rates of return, for case scenarios using the Security Market Line (SML) equation. Minimal detail or support is provided for one or more components.	Submission includes calculations for, and discussion of expected and required rates of return, for case scenarios using the Security Market Line (SML) equation. The submission encompasses essential details and provides appropriate support.	Submission includes calculations for, and discussion of expected and required rates of return, for case scenarios using the Security Market Line (SML) equation. All requirements are incorporated in full and comprehensively. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Discusses expected rate of return in comparison to Treasury bill rates of return for the provided scenario.	Not included.	A discussion of the expected rate of return in comparison to Treasury bill rates of return for the provided scenario is incorporated, but the information provided is incomplete, inaccurate, or otherwise deficient.	A discussion of the expected rate of return in comparison to Treasury bill rates of return for the provided scenario is incorporated, but minimal detail or support is provided for one or more components.	A discussion of the expected rate of return in comparison to Treasury bill rates of return for the provided scenario is incorporated in full. The submission encompasses essential details and provides appropriate support.	A discussion of the expected rate of return in comparison to Treasury bill rates of return for the provided scenario is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
7.0 % Discusses market rate and required rate of return for the provided scenarios, including recommendations and rationale.	Not included.	A discussion of the market rate and required rate of return for the provided scenarios, including recommendations and rationale is present, but the information provided is incomplete, inaccurate, or otherwise deficient.	A discussion of the market rate and required rate of return for the provided scenarios, including recommendations and rationale is present, but minimal detail or support is provided for one or more components.	A discussion of the market rate and required rate of return for the provided scenarios, including recommendations and rationale is present and is incorporated in full. The submission encompasses essential details and provides appropriate support.	A discussion of the market rate and required rate of return for the provided scenarios, including recommendations and rationale is present and comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate.
20.0 % Organization and Effectiveness
7.0 % Thesis Development and Purpose	Paper lacks any discernible overall purpose or organizing claim.	Thesis is insufficiently developed or vague. Purpose is not clear.	Thesis is apparent and appropriate to purpose.	Thesis is clear and forecasts the development of the paper. Thesis is descriptive and reflective of the arguments and appropriate to the purpose.	Thesis is comprehensive and contains the essence of the paper. Thesis statement makes the purpose of the paper clear.
8.0 % Argument Logic and Construction	Statement of purpose is not justified by the conclusion. The conclusion does not support the claim made. Argument is incoherent and uses noncredible sources.	Sufficient justification of claims is lacking. Argument lacks consistent unity. There are obvious flaws in the logic. Some sources have questionable credibility.	Argument is orderly, but may have a few inconsistencies. The argument presents minimal justification of claims. Argument logically, but not thoroughly, supports the purpose. Sources used are credible. Introduction and conclusion bracket the thesis.	Argument shows logical progressions. Techniques of argumentation are evident. There is a smooth progression of claims from introduction to conclusion. Most sources are authoritative.	Clear and convincing argument that presents a persuasive claim in a distinctive and compelling manner. All sources are authoritative.
5.0 % Mechanics of Writing (includes spelling, punctuation, grammar, language use)	Surface errors are pervasive enough that they impede communication of meaning. Inappropriate word choice or sentence construction is used.	Frequent and repetitive mechanical errors distract the reader. Inconsistencies in language choice (register) or word choice are present. Sentence structure is correct but not varied.	Some mechanical errors or typos are present, but they are not overly distracting to the reader. Correct and varied sentence structure and audience-appropriate language are employed.	Prose is largely free of mechanical errors, although a few may be present. The writer uses a variety of effective sentence structures and figures of speech.	Writer is clearly in command of standard, written, academic English.
10.0 % Format
5.0 % Paper Format (use of appropriate style for the major and assignment)	Template is not used appropriately or documentation format is rarely followed correctly.	Appropriate template is used, but some elements are missing or mistaken. A lack of control with formatting is apparent.	Appropriate template is used. Formatting is correct, although some minor errors may be present.	Appropriate template is fully used. There are virtually no errors in formatting style.	All format elements are correct.
5.0 % Documentation of Sources (citations, footnotes, references, bibliography, etc., as appropriate to assignment and style)	Sources are not documented.	Documentation of sources is inconsistent or incorrect, as appropriate to assignment and style, with numerous formatting errors.	Sources are documented, as appropriate to assignment and style, although some formatting errors may be present.	Sources are documented, as appropriate to assignment and style, and format is mostly correct.	Sources are completely and correctly documented, as appropriate to assignment and style, and format is free of error.
100 % Total Weightage