Risk And Return Trade Off Memo

978 words - 4 pages

INTEROFFICE MEMORANDUMTO:RAINIER EKSTROMFROM: , CASA BONITA TREASURY ANALYISTSUBJECT:CASA BONITA INVESTMENT PORTFOLIODATE:FEBRUARY 1, 2010CC:The following will be a recap of recent investment portfolio decisions and actions taken on behalf of Casa Bonita Ceramics with input and guidance from Casa Bonita's CFO, Jerome Walker and Corporate Treasurer, Nina Peres. Last March the investment team was authorized to invest $800,000 in the stock market with minimal risk and the highest yield possible. At that time the following capital market information was true.Market Risk 15%Risk-Free Rate4.88%Market Return 11%Additionally, the following eight companies were provided as options for investments; the financial team was asked to chose the four stocks that would best suit Casa Bonita's investment goals and risk tolerance.1.Desktop, Inc.; the largest seller of office supplies worldwide. Products include business services such as copying, printing, mailing, and shipping, as well as office equipment and software.2.Grand Capital Insurance; a 50-year-old financial services company named as a Fortune 500 diversified financial company.3.Levinthal Defense Systems; a defense contractor that builds missile systems, radars, targeting, reconnaissance, and navigation systems. Levintahl's largest customer is the U.S. Government.4.Infoway Computers; IT products and service provider. Infoway is cutting edge in introducing new products to market and turns inventory very quickly.5.Transconduit, Inc.; leader in designing, developing, and manufacturing high-performance, large badwidth silicon solutions. Also in the market of transport, switching and routing services.6.Goldstein & Delaney Bank: a bank spread across 21 states and 3500 branches that offers retail account services as well as loans, investment, and financial services.7.WesternConnect Airlines; US based short haul low cost air service with the lowest operating cost in the industry and consistently offering the lowest cost airfare. WesternConnect has grown from servicing three cities to 53.8.OneVoice Telecom; One of the largest telecommunication companies providing wire line and wireless communication services.After weighing the risk and possible return of each investment option the decision was made to invest in companies from four unique industries with varying risk rates in order to diversify the portfolio. The four companies chosen for the portfolio were as follows.Stock NameBetaTotal Risk (%)Expected Return (%)Investment AmountDesktop Inc.1.2522.2512.53$200,000Levinthal Defense.9517.1010.69$200,000Goldstein & Delany Bank1.8233.9516.02$200,000Transconduit, Inc.1.1219.7011.73$200,000This allocation of funds resulted in a portfolio risk rate of 20.45%, an expected portfolio return rate of 12.74%, and a Sharpe ratio of 38.46%. The Sharpe ratio is a formula that tells the portfolio manager or investor whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This...

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