Inferior Investment Alternatives What will be the expected

1. What will be the expected return and beta for each of the following portfolios?
a) Portfolios 1 through 4: All of the funds are invested solely in one asset (the corresponding
three stocks or the Treasury bill).
b) Portfolio 5: One-quarter of the funds are invested in each alternative.
c) Portfolio 6: One-half of the funds are invested in stock A and one-half in stock C.
d) Portfolio 7: One-third of the funds are invested in each stock.
2. Are any of the portfolios inefficient?
3. Is there any combination of the Treasury bill and stock C that is superior to portfolio 6 (i.e.,
half the funds in stock A and half in stock C)?
4. Since your clients suggested stock has an anticipated return of 12 percent and a beta of 1.4,
does that information argue for or against the purchase of the stock?
5. Why is it important to consider purchasing an asset as part of a portfolio and not as an
independent act? MINI CASE

Although investing requires the individual to bear risk, the risk can be controlled through the
construction of diversified portfolios and by excluding any portfolio that offers an inferior return
for a given amount of risk. While this concept seems obvious, one of your clients, Laura
Spegele, is considering purchasing a stock that you believe will offer an inferior return for the
risk she will bear. To convince her that the acquisition is not desirable, you want to demonstrate
the trade-off between risk and return.

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Inferior Investment Alternatives What will be the expected
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