Capital Asset Pricing Model Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia Technologies. The two corporations have a correlation of - 0.1789, and their expected returns and standard deviations are as follows:

Kalama Corp. Adelphia Technologies

Expected return (%) 14.86 23.11

Standard deviation (%) 23.36 31.89

Calculate the frontier for all possible investment combinations of Kalama Corp. and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the optimal risky portfolio if the risk- free rate is 3%.

Andrea has $ 50,000 and wants to earn a 19% expected return on her investment. What is the optimal manner in which to structure her portfolio both in dollar amounts and in weights relative to her $ 50,000 based on the preceding information?

Andrea is also seriously considering buying some stock in Medford Barnett Corporation (MBC). The stock prices of MBC and the S& P for the past 25 months are tabulated below. Andrea estimates that MBC will earn a 14% return during the next year, and she expects the market to earn a 12% return during the same time period. In addition, she expects the relationship exhibited between the S& P and MBC to remain as it has in the past. Assuming that Andrea would be pulling MBC into a fully diversified portfolio, is buying the MBC shares a good decision?

Month S& P MBC

1 1,198.41 58.04

2 1,228.81 65.36

3 1,220.33 48.48

4 1,234.18 53.32

5 1,191.33 57.59

6 1,191.50 49.23

7 1,156.85 55.57

8 1,180.59 50.99

9 1,203.60 64.10

10 1,181.27 50.45

11 1,211.92 50.65

12 1,173.82 51.23

13 1,130.20 46.68

14 1,114.58 51.09

15 1,104.24 50.75

16 1,101.72 59.80

17 1,140.84 52.78

18 1,120.68 49.22

19 1,107.30 53.47

20 1,126.21 49.26

21 1,144.94 48.55

22 1,131.13 61.32

23 1,111.92 48.06

24 1,058.20 58.88

25 1,050.71 46.19