Faculty of Economics and Business
Department of Business
FINANCE I (102329) – Group 3 – 2012-13
Study Guide. Dr. Maria-Antonia Tarrazon & Dr. Joan Montllor
EXERCISE 4: THE HEIRS OF ZECHARIAH SEVENBAGS (ZACARIES SETBOSSES)
Another key exercise to check your knowledge about the CML
On the 18th of June 1207 Climent Esnaporell, a monk of the order of the black friars, who practiced
financial alchemy in secret, was walking through the Jewry1. In the middle of Betas Square2 he met three
men and a woman. Two of the men were laughing, the third one was looking at the sky and the woman
was crying. He recognized them: they were the children of Zechariah Sevenbags (Zacaries Setbosses), who
died a week ago. Their names were Eliah (Elies), Jeremiah (Jeremies), Malachi (Malaquies) and Rebekah
(Rebeca). In his will the old Zechariah had left 500.000 denarius invested in financial assets to each of
them: Eliah inherited shares of firm A, Jeremiah of firm B, Malachi of firm C and Rebekah royal bonds.
These financial assets and the market portfolio presented the following features:
Expected return E(Rj)
Standard deviation
(j)
Beta
(j)
Specific risk
(j)
Stock A
12.50%
4.3%
0.5
2.5%
Stock B
17.50%
11.24%
1.5
4%
Stock C
25%
24.19%
3
12%
Royal bonds
10%
0
0
0
Market portfolio
15%
7%
1
0
Eliah was happy because he had stock A, the one with the lowest specific risk. Jeremiah was looking into
the infinite silently, satisfied with stock B, with a standard deviation of 11.24% which he had always desired
since he was a child. Malachi was laughing because he had stock C with the highest expected rate of
return. Rebekah was crying because she considered herself capable of assuming such a high risk as Malachi
and felt herself underestimated by her father.
“Forget about tears and laughs!” – said Climent Esnaporell. “For a small commission I will explain to you
with my humble but efficient financial alchemy:
1) If your financial positions are efficient or inefficient and why; and
2) Which is the investment that really satisfies the wishes of each of you.”
The children of Zechariah Sevenbags accepted to pay the commission that Climent Esnaporell was asking
them for. In exchange they received a good diagnosis and a better advice.
Question: Explain which were the answers given by Climent Esnaporell.
1 In Catalan known as “el barri del Call”.
2 In Catalan known as “la Plaça de les Betes”