Questions 9-10 (30 points total)
Samantha Monat (MSB MBA ’04) was the portfolio manager of the SMB opportunities fund.
had developed a proprietary valuation model which served the fund well over the last five years.
summer, she had trained one of her interns to use the model and had asked them to examine a few different
stocks with it.
Because it was proprietary, she provided the intern the data for the model without letting
them know what the actual stocks were.
Stock A was a leading grocery store chain which had been
profitable each year for the last six, while Stock B was an aerospace firm.
Unfortunately, the Harvard trained intern turned out to be a complete disaster.
While the intern had done
the work, they hadn’t compiled a cohesive report and merely provided a few sparsely labeled graphs.
Moreover, it appeared that the intern really liked drawing lines as each graph included at least one.
graph also showed the equation of every line that was plotted.
showed the returns of Stock A
graphed against the returns on the S&P 500, which SMB used as its measure of the “Market portfolio”.
showed a similar graph for Stock B.
plotted the expected return and expected standard deviation for each of the two stocks based on
the predictions of the model.
According to the model, Stock A had an expected return of 8% with an
expected standard deviation of 18%.
The model projected an expected return for Stock B of 10% with a
standard deviation of 15%.
was also the only graph which included multiple lines.
showed the expected returns for the market and the risk-
free rate as predicted by the fund’s