Marsha whats wrong with that your client wants a

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90%. Marsha: What's wrong with that? Your client wants a diversified portfolio of large-cap stocks. Of course your portfolio will follow the market. John: Why doesn't my client just buy an index fund? Why is he paying me? Am I really adding value by active management? I try, but I guess I'm just an ... indexer. Marsha: Oh, John, I know you're adding value. You were a star security analyst. John: It's not easy to find stocks that are truly over- or undervalued. I have firm opinions about a few, of course. Marsha: You were explaining
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why Pioneer Gypsum is a good buy. And you're bullish on Global Mining. John: Right, Pioneer. (Pulls handwritten notes from his coat pocket.) Stock price $87.50. I estimate the expected return as 11% with an annual standard deviation of 32%. That's twice the market standard deviation of 16%. Marsha: Only 11%? You're forecasting a market return of 12.5%. John: Yes, I'm using a market risk premium of 7.5% and the risk-free interest rate is about 5%. That gives 12.5%. But Pioneer's beta is only.65. I was going to buy 30,000 shares this morning, but I lost my nerve. I've got to stay diversified. Marsha: Have you tried modern portfolio theory?
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