QUESTION 3 

(a) Explain the differences in how modern and traditional theories of a portfolio management approach the issue of diversification.

(b) As an investor you have a required rate of return of 14 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information is as below:

(i) Use the dividend-growth model to estimate the value of each stock. Justify which (if any) should you buy.

(ii) If you purchased Stock A, determine your implied rate of return.

(iii) Determine the price that would be required to persuade you to purchase Stock A if your required rate of return were 10%.