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Essentials Of Investments
Found in: Page 229
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Joan McKay is a portfolio manager for a bank trust department. McKay meets with two clients, Kevin Murray and Lisa York, to review their investment objectives. Each client expresses an interest in changing his or her individual investment objectives. Both clients currently hold well-diversified portfolios of risky assets.

a. Murray wants to increase the expected return of his portfolio. State what action McKay should take to achieve Murray’s objective. Justify your response in the context of the capital market line.

b. York wants to reduce the risk exposure of her portfolio but does not want to engage in borrowing or lending activities to do so. State what action McKay should take to achieve York’s objective. Justify your response in the context of the security market line.

The Correct answer is:

a. Borrow funds and invest these proportionately in existing portfolios.

b. Substitute low beta stocks for high beta stocks to reduce the overall beta of York’s portfolio

See the step by step solution

Step by Step Solution

Step 1: Solution for ‘a’

McKay should borrow funds and invest those funds proportionally in the existing portfolio (i.e. buy more risky assets on margin).

Step 2: Solution for ‘b’

Mckay should substitute low beta stocks for high beta stocks to reduce the overall beta of York’s portfolio. This will reduce the systematic risk of the portfolio and therefore the portfolio’s volatility relative to the market. This also meets the York’s objective of reducing risk exposure.

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