(1) We saw the clip below in week one. There are inherent risks in any type of investment. Of course, in this case Wimpy does not have a job and has an annoying habit of ducking out on his debts. So, what kind of other risks, besides default risk, could you face if you buy Wimpy a hamburger today in return for a payment on Tuesday?
Wimpy "I'd gladly pay you Tuesday for a hamburger today."
(2) You purchased two shares of Amazon stock
on January 1, 2004 for $53.70. However, you recently decided to buy a new big screen HDTV at a fall pre-holiday sale, so you sold your stock on August 1, 2017 at the market price of $962.49. Amazon is a high growth company and invests all its earnings back into company operations. What would your return be on this investment in Amazon? Okay, now imagine an alien has taken over the body of Jeff Bezos and he decided to give every stockholder of record on July 31, 2017, a dividend of $100/share. What would the return on your investment look like now (you can use simple, not compound, interest)?
(3) The text discusses the fact that investors can eliminate most "firm-specific" risk by creating a diversified portfolio of different companies. Does this strategy have a downside for an investor with access to perfect information who is not especially risk averse? [hint: What if you bought one share of Amazon and one share of Time Warner
What would your return look like in that case?
Now, what if the portfolio consists of all companies in the same industry? Does this expose you to more or less risk? How might this affect your returns? [hint: Imagine if you had a portfolio consisting only of Internet stocks in the Summer of 2002
(4) You are considering an investment in an old Beatle's concert poster signed by the group. The T-bill rate is now hovering at ~4.0%. The required rate of return on vintage concert posters is 20%. Beatle's memorabilia is considered especially collectable so the risk is only half that of most concert posters of this age. Based on the CAPM, what rate of return should you expect to earn on your poster?
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