Diversifiable or an Undiversifiable Risk

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School Name: TUI University

Name: Kevin D. Cruise

The Course Dept#: Principles of Finance – FIN 301

Module 3 Case Assignment

Professor’s Name: Dr. John Halstead

Assignment:
1. For each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk.  Please consider the issues from the viewpoint of investors. Explain your reasoning a. A large fire severely damages three major U.S. cities.

b. A substantial unexpected rise in the price of oil.
c. A major lawsuit is filed against one large publicly traded corporation. 2.  Use the CAPM to answer the following questions:
a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 10%, the Risk-Free Rate is 3%, and the Beta (b) for Asset "i" is 1.5.    b. Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 14%, the Expected Return on the Market Portfolio is 12%, and the Beta (b) for Asset "j" is 1.5. c. What do you think the Beta (β) of your portfolio would be if you owned half of all the stocks traded on the major exchanges?  Explain. 3. In one page explain what you think is the main 'message' of the Capital Asset Pricing Model to corporations and what is the main message of the CAPM to investors?  Assignment Expectations:

The Case report should be a two-page report.  Please show your work for quantitative questions.

1. For each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk.  Please consider the issues from the viewpoint of investors. Explain your reasoning a. A large fire severely damages three major U.S. cities.

In this scenario it can be defined as an undiversifiable risk. The companies in these three major U.S. cities are basically victims of circumstance. Let’s take a look at Katrina when it hit Louisiana and Mississippi. While it didn’t affect the whole stock market, it did have a huge impact the economic...
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