1. Calculating alpha values, explain if you agree or disagree with Bushkin€™s selection.
2. Should the information Bart has heard about Alpha€™s new product be a concern in his selection? Explain.
3. Assuming that Bart takes Bushkin€™s advice, calculate the commission he will pay and compare this with the commission he probably would pay to a discount broker.
Bart Parks is a bachelor, 33 years old, with a good income and a reasonable net worth. Bart has about $20,000 invested in individual common stocks, most of them recommended by his broker, Buzz Bushkin. He€™s done well with Bushkin over the years, and he is particularly pleased that Bushkin always gives him a list of several stocks to choose from, instead of just one. Bart has saved another $3,000 for the market and has asked Bushkin for a new list, which follows. Bushkin recommends Alpha Dynamics, but Bart is concerned with this selection because he has heard that Alpha€™s latest product€”an automatic envelope opener€”has not met huge market acceptance. Bart has turned to you for help, and in response you have gathered the following data on expected returns and betas.

Bart doesn€™t consider himself either excessively risk averting or risk seeking, but he does expect a return commensurate with the degree of risk inherent in a security. Also, Bart€™s current holdings give him adequate diversification, so that need not concern him in selecting a stock now. Finally, Bart uses a market risk premium of 8 percent.

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Security Current Price Expected Return Beta Bushkin's alternatives $10 18 Alpha dynamics Beta depressants Gamma globulins U.S. Treasury bills A market index fund 25% 5% 27% 5% 13% 2.0 0.3 3.1 0.0 1.0 16