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 Chapter 6
Risk and Return
ANSWERS TO END-OF-CHAPTER QUESTIONS

6-1 a. Stand-alone risk is only a part of total risk and pertains to the risk an investor takes by
holding only one asset. Risk is the chance that some unfavorable event will occur.
For instance, the risk of an asset is essentially the chance that the asset’s cash flows
will be unfavorable or less than expected. A probability distribution is a listing, chart
or graph of all possible outcomes, such as expected rates of return, with a probability
assigned to each outcome. When in graph form, the tighter the probability
distribution, the less uncertain the outcome.

b. The expected rate of return (^r ) is the expected value of a probability distribution of
expected returns.

c. A continuous probability distribution contains an infinite number of outcomes and is

graphed from - and +.

d. The standard deviation (σ) is a statistical measure of the variability of a set of

observations. The variance (σ2) of the probability distribution is the sum of the
squared deviations about the expected value adjusted for deviation.

e. A risk averse investor dislikes risk and requires a higher rate of return as an
inducement to buy riskier securities. A realized return is the actual return an investor
receives on their investment. It can be quite different than their expected return.

f. A risk premium is the difference between the rate of return on a risk-free asset and the
expected return on Stock i which has higher risk. The market risk premium is the
difference between the expected return on the market and the risk-free rate.

g. CAPM is a model based upon the proposition that any stock’s required rate of return
is equal to the risk free rate of return plus a risk premium reflecting only the risk
remaining after diversification.

Answers and Solutions: 6 - 1

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 
h. The expected return on a portfolio. r p, is simply the weighted-average expected
return of the individual stocks in the portfolio, with the weights being the fraction of
total portfolio value invested in each stock. The market portfolio is a portfolio
consisting of all stocks.

i. Correlation is the tendency of two variables to move together. A correlation

coefficient (ρ) of +1.0 means that the two variables move up and down in perfect
synchronization, while a coefficient of -1.0 means the variables always move in
opposite directions. A correlation coefficient of zero suggests that the two variables
are not related to one another; that is, they are independent.

j. Market risk is that part of a security’s total risk that cannot be eliminated by
diversification. It is measured by the beta coefficient. Diversifiable risk is also
known as company specific risk, that part of a security’s total risk associated with
random events not affecting the market as a whole. This risk can be eliminated by
proper diversification. The relevant risk of a stock is its contribution to the riskiness
of a well-diversified portfolio.

k. The beta coefficient is a measure of a stock’s market risk, A stock with a beta greater
than 1 has stock returns that tend to be higher than the market when the market is up
but tend to be below the market when the market is down. The opposite is true for a
stock with a beta less than 1..

l. The security market line (SML) represents in a graphical form, the relationship
between the risk of an asset as measured by its beta and the required rates of return
for individual securities. The SML equation is essentially the CAPM, ri = rRF +
bi(RPM). It can also be written in terms of the required market return: ri = rRF + bi(rM -
rRF).

m. The slope of the SML equation is (rM - rRF), the market risk premium. The slope of
the SML reflects the degree of risk aversion in the economy. The greater the average
investors aversion to risk, then the steeper the slope, the higher the risk premium for
all stocks, and the higher the required return.

Answers and Solutions: 6 - 2

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 n. Equilibrium is the condition under which the expected return on a security is just

equal to its required return, r = r, and the market price is equal to the intrinsic value.
The Efficient Markets Hypothesis (EMH) states (1) that stocks are always in
equilibrium and (2) that it is impossible for an investor to consistently “beat the
market.” In essence, the theory holds that the price of a stock will adjust almost
immediately in response to any new developments. In other words, the EMH
assumes that all important information regarding a stock is reflected in the price of
that stock. Financial theorists generally define three forms of market efficiency:
weak-form, semistrong-form, and strong-form.
Weak-form efficiency assumes that all information contained in past price
movements is fully reflected in current market prices. Thus, information about recent
trends in a stock’s price is of no use in selecting a stock. Semistrong-form efficiency
states that current market prices reflect all publicly available information. Therefore,
the only way to gain abnormal returns on a stock is to possess inside information
about the company’s stock. Strong-form efficiency assumes that all information
pertaining to a stock, whether public or inside information, is reflected in current
market prices. Thus, no investors would be able to earn abnormal returns in the stock
market.

o. The Fama-French 3-factor model has one factor for the excess market return (the
market return minus the risk free rate), a second factor for size (defined as the return
on a portfolio of small firms minus the return on a portfolio of big firms), and a third
factor for the book-to-market effect (defined as the return on a portfolio of firms with
a high book-to-market ratio minus the return on a portfolio of firms with a low book-
to-market ratio).

p. Most people don’t behave rationally in all aspects of their personal lives, and
behavioral finance assumes that investors have the same types of psychological
behaviors in their financial lives as in their personal lives.
Anchoring bias is the human tendency to “anchor” too closely on recent events
when predicting future events. Herding is the tendency of investors to follow the
crowd. When combined with overconfidence, anchoring and herding can contribute to
market bubbles.

6-2 a. The probability distribution for complete certainty is a vertical line.

b. The probability distribution for total uncertainty is the X axis from - to +.

Answers and Solutions: 6 - 3

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
6-3 Security A is less risky if held in a diversified portfolio because of its lower beta and
negative correlation with other stocks. In a single-asset portfolio, Security A would be
more risky because σA > σB and CVA > CVB.

6-4 The risk premium on a high beta stock would increase more.

RPj = Risk Premium for Stock j = (rM - rRF)bj.

If risk aversion increases, the slope of the SML will increase, and so will the market risk
premium (rM – rRF). The product (rM – rRF)bj is the risk premium of the jth stock. If bj is
low (say, 0.5), then the product will be small; RPj will increase by only half the increase
in RPM. However, if bj is large (say, 2.0), then its risk premium will rise by twice the
increase in RPM.

6-5 According to the Security Market Line (SML) equation, an increase in beta will increase
a company’s expected return by an amount equal to the market risk premium times the
change in beta. For example, assume that the risk-free rate is 6 percent, and the market
risk premium is 5 percent. If the company’s beta doubles from 0.8 to 1.6 its expected
return increases from 10 percent to 14 percent. Therefore, in general, a company’s
expected return will not double when its beta doubles.

Answers and Solutions: 6 - 4

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 SOLUTIONS TO END-OF-CHAPTER PROBLEMS

6-1 Investment Beta

$20,000 0.7
35,000 1.3
Total $55,000

($20,000/$55,000)(0.7) + ($35,000/$55,000)(1.3) = 1.08.

6-2 rRF = 4%; rM = 12%; b = 0.8; rs = ?

rs = rRF + (rM - rRF)b

= 4% + (12% - 4%)0.8
= 10.4%.

6-3 rRF = 5%; RPM = 7%; rM = ?

rM = 5% + (7%)1 = 12% = rs when b = 1.0.

rs when b = 1.7 = ?

rs = 5% + 7%(1.7) = 16.9%.

6-4 Predicted return = ai + bi(r̄ M,t  r̄ RF,t) + ci(r̄ SMB,t) + di(r̄ HML,t)
= 0.0% + 1.2(10% - 5%) + (-0.4)(3.2%) + 1.3(4.8%)
= 10.96%


6-5 r = (0.1)(-50%) + (0.2)(-5%) + (0.4)(16%) + (0.2)(25%) + (0.1)(60%)
= 11.40%.

σ2 = (-50% - 11.40%)2(0.1) + (-5% - 11.40%)2(0.2) + (16% - 11.40%)2(0.4)

+ (25% - 11.40%)2(0.2) + (60% - 11.40%)2(0.1)
σ = 712.44; σ= 26.69%.
2

Answers and Solutions: 6 - 5

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 
6-6 a. r m= (0.3)(15%) + (0.4)(9%) + (0.3)(18%) = 13.5%.


r j= (0.3)(20%) + (0.4)(5%) + (0.3)(12%) = 11.6%.

b. σM = [(0.3)(15% - 13.5%)2 + (0.4)(9% - 13.5%)2 + (0.3)(18% -13.5%)2]1/2

= 14.85% = 3.85%.

σJ = [(0.3)(20% - 11.6%)2 + (0.4)(5% - 11.6%)2 + (0.3)(12% - 11.6%)2]1/2

= 38.64% = 6.22%.

6-7 a. rA = rRF + (rM - rRF)bA

12% = 5% + (10% - 5%)bA
12% = 5% + 5%(bA)
7% = 5%(bA)
1.4 = bA.

b. rA = 5% + 5%(bA)
rA = 5% + 5%(2)
rA = 15%.

Answers and Solutions: 6 - 6

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
6-8 a. ri = rRF + (rM - rRF)bi = 5% + (12% - 5%)1.4 = 14.8%.

b. 1. rRF increases to 6%:

rM increases by 1 percentage point, from 12% to 13%.

ri = rRF + (rM - rRF)bi = 6% + (12% - 5%)1.4 = 15.8%.

2. rRF decreases to 4%:

rM decreases by 1%, from 12% to 11%.

ri = rRF + (rM - rRF)bi = 4% + (12% - 5%)1.4 = 13.8%.

c. 1. rM increases to 14%:

ri = rRF + (rM - rRF)bi = 5% + (14% - 5%)1.4 = 17.6%.

2. rM decreases to 11%:

ri = rRF + (rM - rRF)bi = 5% + (11% - 5%)1.4 = 13.4%.

Answers and Solutions: 6 - 7

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 $70,000 $5,000
6-9 Old portfolio beta = (b) + (0.8)
$75,000 $75,000
1.2 = 0.9333b + 0.0533
1.1467 = 0.9333b
1.229 = b.

New portfolio beta = 0.9333(1.229) + 0.0667(1.6) = 1.25.

Alternative Solutions:

1. Old portfolio beta = 1.2 = (0.0667)b1 + (0.0667)b2 +...+ (0.0667)b20

1.2 = (bi)(0.0667)
bi = 1.2/0.0667 = 18.0.

New portfolio beta = (18.0 - 0.8 + 1.6)(0.0667) = 1.253 = 1.25.

2. bi excluding the stock with the beta equal to 0.8 is 18.0 - 0.8 = 17.2, so the beta of
the portfolio excluding this stock is b = 17.2/14 = 1.2286. The beta of the new
portfolio is:

1.2286(0.9333) + 1.6(0.0667) = 1.1575 = 1.253.

Answers and Solutions: 6 - 8

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 $400,000 $600,000
6-10 Portfolio beta = (1.50) + (-0.50)
$4,000,000 $4,000,000
$1,000,000 $2,000,000
+ (1.25) + (0.75)
$4,000,000 $4,000,000
= 0.1)(1.5) + (0.15)(-0.50) + (0.25)(1.25) + (0.5)(0.75)
= 0.15 - 0.075 + 0.3125 + 0.375 = 0.7625.

rp = rRF + (rM - rRF)(bp) = 6% + (14% - 6%)(0.7625) = 12.1%.

Alternative solution: First compute the return for each stock using the CAPM equation
[rRF + (rM - rRF)b], and then compute the weighted average of these returns.

rRF = 6% and rM - rRF = 8%.

Stock Investment Beta r = rRF + (rM - rRF)b Weight

A $ 400,000 1.50 18% 0.10
B 600,000 (0.50) 2 0.15
C 1,000,000 1.25 16 0.25
D 2,000,000 0.75 12 0.50
Total $4,000,000 1.00

rp = 18%(0.10) + 2%(0.15) + 16%(0.25) + 12%(0.50) = 12.1%.

6-11 First, calculate the beta of what remains after selling the stock:

bp = 1.1 = ($100,000/$2,000,000)0.9 + ($1,900,000/$2,000,000)bR

1.1 = 0.045 + (0.95)bR
bR = 1.1105.

bN = (0.95)1.1105 + (0.05)1.4 = 1.125.

Answers and Solutions: 6 - 9

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
6-12 We know that bR = 1.50, bS = 0.75, rM = 13%, rRF = 7%.

ri = rRF + (rM - rRF)bi = 7% + (13% - 7%)bi.

rR = 7% + 6%(1.50) = 16.0%
rS = 7% + 6%(0.75) = 11.5
4.5%

6-13 The answers to a, b, and c are given below:

r̄ A r̄ B Portfolio
2012 (20.00%) (5.00%) (12.50%)
2013 42.00 15.00 28.50
2014 20.00 (13.00) 3.50
2015 (8.00) 50.00 21.00
2016 25.00 12.00 18.50

Mean 11.80 11.80 11.80

Std Dev 25.28 24.32 16.34

d. A risk-averse investor would choose the portfolio over either Stock A or Stock B
alone, since the portfolio offers the same expected return but with less risk. This
result occurs because returns on A and B are not perfectly positively correlated (ρAB =
-0.13).

6-14 a. bX = 1.3471; bY = 0.6508. These can be calculated with a spreadsheet.

b. rX = 6% + (5%)1.3471 = 12.7355%.
rY = 6% + (5%)0.6508 = 9.2540%.

c. bp = 0.8(1.3471) + 0.2(0.6508) = 1.2078.

rp = 6% + (5%)1.2078 = 12.04%.
Alternatively,
rp = 0.8(12.7355%) + 0.2(9.254%) = 12.04%.

Answers and Solutions: 6 - 10

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or in part.
 SOLUTION TO SPREADSHEET PROBLEM

6-15 The detailed solution for the spreadsheet problem is available in the file Ch06-P15 Build
a Model Solution.xlsx on the textbook’s Web site.

Answers and Solutions: 6 - 11

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 MINI CASE

Assume that you recently graduated and landed a job as a financial planner with Cicero
Services, an investment advisory company. Your first client recently inherited some assets
and has asked you to evaluate them. The client owns a bond portfolio with $1 million
invested in zero coupon Treasury bonds that mature in 10 years. The client also has $2
million invested in the stock of Blandy, Inc., a company that produces meat-and-potatoes
frozen dinners. Blandy’s slogan is “Solid food for shaky times.”
Unfortunately, Congress and the president are engaged in an acrimonious dispute over the budget
and the debt ceiling. The outcome of the dispute, which will not be resolved until the end of the
year, will have a big impact on interest rates one year from now. Your first task is to determine
the risk of the client’s bond portfolio. After consulting with the economists at your firm, you
have specified five possible scenarios for the resolution of the dispute at the end of the year. For
each scenario, you have estimated the probability of the scenario occurring and the impact on
interest rates and bond prices if the scenario occurs. Given this information, you have calculated
the rate of return on 10-year zero coupon Treasury bonds for each scenario. The probabilities and
returns are shown below:

Return on a 10-Year Zero

Probability Coupon Treasury Bond
Scenario of Scenario During the Next Year
Worst Case 0.10 −14%
Poor Case 0.20 −4%
Most Likely 0.40 6%
Good Case 0.20 16%
Best Case 0.10 26%
1.00

You have also gathered historical returns for the past 10 years for Blandy, Gourmange
Corporation (a producer of gourmet specialty foods), and the stock market.

Mini Case: 6 - 12
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 Historical Stock Returns
Year Market Blandy Gourmange
1 30% 26% 47%
2 7 15 −54
3 18 −14 15
4 −22 −15 7
5 −14 2 −28
6 10 −18 40
7 26 42 17
8 −10 30 −23
9 −3 −32 −4
10 38 28 75
Average return: 8.0% ? 9.2%
Standard deviation: 20.1% ? 38.6%
Correlation with the market: 1.00 ? 0.678
Beta: 1.00 ? 1.30

The risk-free rate is 4% and the market risk premium is 5%.

a. What are investment returns? What is the return on an investment that costs
$1,000 and is sold after 1 year for $1,060?

Answer: Investment return measures the financial results of an investment. They may be
expressed in either dollar terms or percentage terms.
The dollar return is $1,60 - $1,000 = $60. The percentage return is $60/$1,000 =
0.06 = 6%.

b. Graph the probability distribution for the bond returns based on the 5 scenarios.
What might the graph of the probability distribution look like if there were an
infinite number of scenarios (i.e., if it were a continuous distribution and not a
discrete distribution)?

Mini Case: 6 - 13
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or in part.
Answer: Here is the probability distribution for the five possible outcomes:

Mini Case: 6 - 14
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
 A continuous distribution might look like this:

c. Use the scenario data to calculate the expected rate of return for the 10-year zero
coupon Treasury bonds during the next year.


Answer: The expected rate of return, r , is expressed as follows:

 n
r =  Pi r i .
i =1

Here pi is the probability of occurrence of the ith state, ri is the estimated rate of
return for that state, and n is the number of states. Here is the calculation:


r = 0.1(-14.0%) + 0.2(-4.0%) + 0.4(6.0%) + 0.2(16.0%) + 0.1(26.0%)
= 6.0%.

Mini Case: 6 - 15
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or in part.
d. What is stand-alone risk? Use the scenario data to calculate the standard
deviation of the bond’s return for the next year.

Answer: Stand-alone risk is the risk of an asset if it is held by itself and not as a part of a
portfolio. Standard deviation measures the dispersion of possible outcomes, and for a
single asset, the stand-alone risk is measured by standard deviation.

The variance and standard deviation are calculated as follows:

n
σ2 =  pi (r i - r̂i )2
i =1

n
σ 2  2 =  pi (r i - r̂i )2 .
i =1

σ2 = [(0.1) (-0.14 – 0.06)2 + (0.2) (-0.04 – 0.06)2 + (0.4) (0.06 – 0.06)2

+ (0.2) (0.16 – 0.06)2 + (0.1) (0.26 – 0.06)2]
σ2 = 0.0120

σ= 2 0.0120 = 0.1095 = 10.95%.

Mini Case: 6 - 16
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or in part.
e. Your client has decided that the risk of the bond portfolio is acceptable and
wishes to leave it as it is. Now your client has asked you to use historical returns
to estimate the standard deviation of Blandy’s stock returns. (Note: Many
analysts use 4 to 5 years of monthly returns to estimate risk and many use 52
weeks of weekly returns; some even use a year or less of daily returns. For the
sake of simplicity, use Blandy’s 10 annual returns.)

Answer: The formulas are shown below:

T
 r
t 1 t
rˉAvg =
T

T
 (rt  rAvg ) 2
t 1
Estimated σ = S =
T 1

Using Excel, the past average returns and standard deviations are:

Market Blandy Gourmange

Average return: 8.0% 6.4% 9.2%
Standard deviation of returns: 20.1% 25.2% 38.6%

Mini Case: 6 - 17
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or in part.
f. Your client is shocked at how much risk Blandy stock has and would like to
reduce the level of risk. You suggest that the client sell 25% of the Blandy stock
and create a portfolio with 75% Blandy stock and 25% in the high-risk
Gourmange stock. How do you suppose the client will react to replacing some of
the Blandy stock with high-risk stock? Show the client what the proposed
portfolio return would have been in each of year of the sample. Then calculate
the average return and standard deviation using the portfolio’s annual returns.
How does the risk of this two-stock portfolio compare with the risk of the
individual stocks if they were held in isolation?

Answer: To find historical returns on the portfolio, we first find each annual return for the
portfolio using the portfolio weights and the annual stock returns:

The percentage of a portfolio’s value that is invested in Stock i is denoted by the

“weight” wi. Notice that the sum of all the weights must equal 1. With n stocks in the
portfolio, its return each year will be:

r‾p = w1r‾1 + w2r‾2 + . . . + wnr‾n

n
=  w i ri
i 1
The portfolio return each year will be:
r̅P,t = wBlandy (r̅ Blandy,t ) + wGour. (r̅ Gour.,t )
r̅P,t = 0.75(r̅Blandy,t ) + 0.25(r̅ Gour.,t )

Mini Case: 6 - 18
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or in part.
 Following is a table showing the portfolio’s return in each year. It also shows the
average return and standard deviation during the past 10 years.

Stock Returns
Year Blandy Gourmange Portfolio

1 26% 47% 31.3%

2 15% -54% -2.3%
3 -14% 15% -6.8%
4 -15% 7% -9.5%
5 2% -28% -5.5%
6 -18% 40% -3.5%
7 42% 17% 35.8%
8 30% -23% 16.8%
9 -32% -4% -25.0%
10 28% 75% 39.8%
Average return: 6.4% 9.2% 7.1%
Standard deviation of returns: 25.2% 38.6% 22.2%

Notice that the portfolio risk is actually less than the standard deviations of the
stocks making up the portfolio.

The average portfolio return during the past 10 years can be calculated as average
return of the 10 yearly returns. But there is another way—the average portfolio return
over a number of periods is also equal to the weighted average of the stock’s average
returns:
n
r‾Avg,p =  w i rAvg, i
i 1
This method is used below:
r‾Avg,p = 0.75(6.4%) + 0.25(9.2%) = 7.1%

Note, however, that the only way to calculate the standard deviation of
historical returns for a portfolio is to first calculate the portfolio’s annual
historical returns and then calculate its standard deviation. A portfolio’s
historical standard deviation is not the weighted average of the individual
stocks’ standard deviations! (The only exception occurs when there is zero
correlation among the portfolio’s stocks, which would be extremely rare.)

Mini Case: 6 - 19
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or in part.
g. Explain correlation to your client. Calculate the estimated correlation between
Blandy and Gourmange. Does this explain why the portfolio standard deviation
was less than Blandy’s standard deviation?

Answer: Loosely speaking, the correlation (ρ) coefficient measures the tendency of two
variables to move together. The formula, shown below, is complicated, but it is easy
to use Excel to calculate the correlation.

T
 (ri, t  ri, Avg )(rj, t  rj, Avg )
t 1
Estimated ρi,j = R =

T  T 
  (ri, t  ri, Avg ) 2    (r j, t  r j, Avg ) 2 
t 1  t 1 
   

Using Excel, the correlation between Blandy (B) and Gourmange (G) is:
Est. ρB,G = 0.11

A correlation coefficient of +1 means that the stocks always move together; a

correlation coefficient of −1 means that the stocks always move oppositely to one
another. A correlation coefficient of 0 means that there is no relationship between the
stocks’ movements. The correlation coefficient of 0.11 means that sometime when
Blandy is up, Gourmange is down, and vice versa. This makes the total risk of the
portfolio less than the risk of holding either stock by itself.

h. Suppose an investor starts with a portfolio consisting of one randomly selected

stock. As more and more randomly selected stocks are added to the portfolio,
what happens to the portfolio’s risk?

Answer: The standard deviation gets smaller as more stocks are combined in the portfolio,
while rp (the portfolio’s return) remains constant. Thus, by adding stocks to your
portfolio, which initially started as a 1-stock portfolio, risk has been reduced.

Mini Case: 6 - 20
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or in part.
 In the real world, stocks are positively correlated with one another--if the
economy does well, so do stocks in general, and vice versa. Correlation coefficients
between stocks generally range from +0.5 to +0.7. The average correlation between
stocks is about 0.35. A single stock selected at random would on average have a
standard deviation of about 35 percent. As additional stocks are added to the
portfolio, the portfolio’s standard deviation decreases because the added stocks are
not perfectly positively correlated. However, as more and more stocks are added,
each new stock has less of a risk-reducing impact, and eventually adding additional
stocks has virtually no effect on the portfolio’s risk as measured by σ. In fact, σ
stabilizes at about 20 percent when 40 or more randomly selected stocks are added.
Thus, by combining stocks into well-diversified portfolios, investors can eliminate
almost one-half the riskiness of holding individual stocks. (Note: it is not completely
costless to diversify, so even the largest institutional investors hold less than all
stocks. Even index funds generally hold a smaller portfolio which is highly
correlated with an index such as the S&P 500 rather than hold all the stocks in the
index.)
The implication is clear: investors should hold well-diversified portfolios of
stocks rather than individual stocks. (In fact, individuals can hold diversified
portfolios through mutual fund investments.) By doing so, they can eliminate about
half of the riskiness inherent in individual stocks.

Mini Case: 6 - 21
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or in part.
i. 1. Should portfolio effects influence how investors think about the risk of
individual stocks?

Answer: Portfolio diversification does affect investors’ views of risk. A stock’s stand-alone
risk as measured by its σ or CV, may be important to an undiversified investor, but it
is not relevant to a well-diversified investor. A rational, risk-averse investor is more
interested in the impact that the stock has on the riskiness of his or her portfolio than
on the stock’s stand-alone risk. Stand-alone risk is composed of diversifiable risk,
which can be eliminated by holding the stock in a well-diversified portfolio, and the
risk that remains is called market risk because it is present even when the entire
market portfolio is held.

i. 2. If you decided to hold a one-stock portfolio and consequently were exposed to

more risk than diversified investors, could you expect to be compensated for all
of your risk; that is, could you earn a risk premium on that part of your risk
that you could have eliminated by diversifying?

Answer: If you hold a one-stock portfolio, you will be exposed to a high degree of risk, but
you won’t be compensated for it. If the return were high enough to compensate you
for your high risk, it would be a bargain for more rational, diversified investors. They
would start buying it, and these buy orders would drive the price up and the return
down. Thus, you simply could not find stocks in the market with returns high enough
to compensate you for the stock’s diversifiable risk.

j. According to the Capital Asset Pricing Model, what measures the amount of risk
that an individual stock contributes to a well-diversified portfolio? Define this
measurement.

Answer: Market risk, which is relevant for stocks held in well-diversified portfolios, is defined
as the contribution of a security to the overall risk of the portfolio. It is measured by
a stock’s beta coefficient. The beta of Stock i, denoted by bi, is calculated as:

  
bi =  i  iM
 M 

A stock’s beta can also be estimated by running a regression with the stock’s
returns on the y axis and the market portfolio’s returns on the x axis. The slope of the
regression line gives the same result as the formula shown above.

Mini Case: 6 - 22
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or in part.
k. What is the Security Market Line (SML)? How is beta related to a stock’s
required rate of return?

Answer: Here is the SML equation:

ri = rRf + RPM bi.

ri = rRf + (rM − rRf)bi.

The SML asserts that because investing in stocks is risky, an investor must expect
to get at least the risk-free rate of return plus a premium to reflect the additional risk
of the stock. The premium is for a stock begins with the premium required to hold an
average stock (RPM) and is scaled up or down depending on the stock’s beta.

l. Calculate the correlation coefficient between Blandy and the market. Use this
and the previously calculated (or given) standard deviations of Blandy and the
market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a
well-diversified portfolio than does the average stock? Use the SML to estimate
Blandy’s required return.

Answer: Using the formula for correlation or the Excel function, CORREL, Blandy’s
correlation with the market (ρB,M) is:
ρB,M = 0.481

    0.252 
bi =  i iM  (0.481) = 0.6
 M   0.201 

Blandy’s beta is less than 1, so it contributes less risk than that of an average
stock.

Suppose the risk free rate is 4% and the market risk premium is 5%. The required
rate of return on Blandy is
ri = rRF + bi (RPM)
ri = 4% + 0.60(5%) = 7%

Mini Case: 6 - 23
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or in part.
m. Show how to estimate beta using regression analysis.

Answer: Betas are calculated as the slope of the “characteristic” line, which is the regression
line showing the relationship between a given stock’s returns and the stock market’s
returns. The graph below shows this regression as calculated using Excel.

Mini Case: 6 - 24
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or in part.
n. 1. Suppose the risk-free rate goes up to 7%. What effect would higher interest rates have
on the SML and on the returns required on high-risk and low-risk securities?

Answer: The SML is shifted higher, but the slope is unchanged.

Here we have plotted the SML for betas ranging from 0 to 2.0. The base case
SML is based on r RF = 4% and r M = 5%. If interest rates increase by 3 percentage
points, with no change in risk aversion, then the entire SML is shifted upward
(parallel to the base case SML) by 3 percentage points. Now, r RF = 7%, r M = 12%,
and all securities’ required returns rise by 3 percentage points. Note that the market
risk premium, r m − r RF , remains at 5 percentage points.

n. 2. Suppose instead that investors’ risk aversion increased enough to cause the
market risk premium to increase to 8%. (Assume the risk-free rate remains
constant.) What effect would this have on the SML and on returns of high- and
low-risk securities?

Answer: When investors’ risk aversion increases, the SML is rotated upward about the y-
intercept, which is rRF. Suppose rRF remains at 4 percent, but now rM increases to 12
percent, so the market risk premium increases to 8 percent. The required rate of

Mini Case: 6 - 25
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or in part.
 return will rise sharply on high-risk (high-beta) stocks, but not much on low-beta
securities.

o. Your client decides to invest $1.4 million in Blandy stock and $0.6 million in
Gourmange stock. What are the weights for this portfolio? What is the
portfolio’s beta? What is the required return for this portfolio?

Answer: The portfolio’s beta is the weighted average of the stocks’ betas:
bp = 0.7(bBlandy) + 0.3(bGour.)
= 0.7(0.60) + 0.3(1.30)
= 0.81.

There are two ways to calculate the portfolio’s expected return. First, we can use
the portfolio’s beta and the SML:
rp = rRF + bp (RPM)
= 4.0% + 0.81%(5%) = 8.05%.

Second, we can find the weighted average of the stocks’ expected returns:
n
rp =  w i ri
i 1
Mini Case: 6 - 26
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or in part.
 = 0.7(7.0%) + 0.3(10.5%)
= 8.05%.

p. Jordan Jones (JJ) and Casey Carter (CC) are portfolio managers at your firm.
Each manages a well-diversified portfolio. Your boss has asked for your opinion
regarding their performance in the past year. JJ’s portfolio has a beta of 0.6 and
had a return of 8.5%; CC’s portfolio has a beta of 1.4 and had a return of 9.5%.
Which manager had better performance? Why?

Answer: To evaluate the managers, calculate the required returns on their portfolios using the
SML and compare the actual returns to the required returns, as follows:

Portfolio Manager
JJ CC
Portfolio beta = 0.7 1.4
Risk-free rate = 4% 4%
Market risk premium = 5% 5%
Portfolio required return
7.50% 11.00%
=
Portfolio actual return = 8.50% 9.50%
Over (Under)
1.00% -1.50%
Performance =

Notice that JJ’s portfolio had a higher return than investors required (given the
risk of the portfolio) and CC’s portfolio had a lower return than expected by
investors. Therefore, JJ had the better performance.

q. What does market equilibrium mean? If equilibrium does not exist, how will it
be established?

Answer: Market equilibrium means that marginal investors (the ones whose trades determine
prices) believe that all securities are fairly priced. This means that the market price of
a security must equal the security’s intrinsic value (intrinsic value reflects the size,
timing, and risk of the future cash flows):

Market price = Intrinsic value

Market equilibrium also means that the expected return a security must equal its
required return (which reflects the security’s risk).
𝐫̂ = r

Mini Case: 6 - 27
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 If the market is not in equilibrium, then some assets will be undervalued and/or
some will be overvalued. If this is the case, traders will attempt to make a profit by
purchasing undervalued securities and short-selling overvalued securities. The
additional demand for undervalued securities will drive up their prices and the lack of
demand for overvalued securities will drive down their prices. This will continue until
market prices equal intrinsic values, at which point the traders will not be able to earn
profits greater than justified by the assets’ risks.

r. What is the Efficient Markets Hypothesis (EMH) and what are its three forms?
What evidence supports the EMH? What evidence casts doubt on the EMH?

Answer: The EMH is the hypothesis that securities are normally in equilibrium, and are
“priced fairly,” making it impossible to “beat the market.”
Weak-form efficiency says that investors cannot profit from looking at past
movements in stock prices--the fact that stocks went down for the last few days is no
reason to think that they will go up (or down) in the future. This form has been
proven by empirical tests, even though people still employ “technical analysis.”
Semistrong-form efficiency says that all publicly available information is
reflected in stock prices, hence that it won’t do much good to pore over annual reports
trying to find undervalued stocks. This one is (I think) largely true, but superior
analysts can still obtain and process new information fast enough to gain a small
advantage.
Strong-form efficiency says that all information, even inside information, is
embedded in stock prices. This form does not hold--insiders know more, and could
take advantage of that information to make abnormal profits in the markets. Trading
on the basis of insider information is illegal.
Most empirical evidence supports weak-form EMH because very few trading
strategies consistently earn in excess of the CAPM prediction, with two possible
exceptions that earn very small excess returns: (1) short-term momentum and (2)
long-term reversals.
Most empirical evidence supports the semistrong-form EMH. For example, the
vast majority of portfolio managers do not consistently have returns in excess of
CAPM predictions. There are two possible exceptions that earn excess returns: (1)
small companies and (2) companies with high book-to-market ratios.
In addition, there are times when a market becomes overvalued. This is often
called a bubble. Bubbles are hard to burst because trading strategies expose traders to
possible big negative cash flows if the bubble is slow to burst.

Mini Case: 6 - 28
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 Web Appendix 6B
Calculating Beta Coefficients With a Financial Calculator

Solutions to Problems
6B-1 a. rY (%)

40

30
 
20


10


  rM (%)
-30 -20 -10 10 20 30 40


b = Slope = 0.62. However, b will depend on students’ freehand line. Using a calculator,
we find b = 0.6171 ≈ 0.62.

b. Because b = 0.62, Stock Y is about 62% as volatile as the market; thus, its relative risk is
about 62% that of an average stock.

c. 1. Stand-alone risk as measured by  would be greater, but beta and hence systematic
(relevant) risk would remain unchanged. However, in a 1-stock portfolio, Stock Y
would be riskier under the new conditions.

2. CAPM assumes that company-specific risk will be eliminated in a portfolio, so the

risk premium under the CAPM would not be affected. However, if the scatter were
wide, we would not have as much confidence in the beta, and this could increase the
stock's risk and thus its risk premium.

d. 1. The stock's variance and  would not change, but the risk of the stock to an investor
holding a diversified portfolio would be greatly reduced, because it would now have
a negative correlation with rM.

Web Solutions: 6B - 29
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or in part.
 2. Because of a relative scarcity of such stocks and the beneficial net effect on portfolios
that include it, its “risk premium” is likely to be very low or even negative.
Theoretically, it should be negative.

e. The following figure shows a possible set of probability distributions. We can be

reasonably sure that the 100-stock portfolio comprised of b = 0.62 stocks as described in
Condition 2 will be less risky than the “market.” Hence, the distribution for Condition 2
will be more peaked than that of Condition 3.

Kr 100

Kr Y

Kr M

9.8

We can also say on the basis of the available information that Y is smaller than M;
Stock Y’s market risk is only 62% of the “market,” but it does have company-specific
risk, while the market portfolio does not, because it has been diversified away. However,
we know from the given data that Y = 13.8%, while M = 19.6%. Thus, we have drawn
the distribution for the single stock portfolio more peaked than that of the market. The
relative rates of return are not reasonable. The return for any stock should be
ri = rRF + (rM – rRF)bi.

Stock Y has b = 0.62, while the average stock (M) has b = 1.0; therefore,

ry = rRF + (rM – rRF)0.62 < rM = rRF + (rM – rRF)1.0.

A disequilibrium exists—Stock Y should be bid up to drive its yield down. More likely,
however, the data simply reflect the fact that past returns are not an exact basis for
expectations of future returns.

Web Solutions: 6B - 30
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or in part.
Exploring the Variety of Random
Documents with Different Content
I shook my head virtuously. "I haven't set eyes on her all day," I
said. "I don't know where she is and I refuse to be held responsible
for her in any particular. She's your look-out, not mine."
"Why, you!—" The doctor started forward, menacing me with his
surgical little fists.
"Wait a minute, Jerry," the contralto voice ordered. "Let me handle
this!"
Germaine Tompkins stepped forward into the room and stood in the
flickering light of the electric peat. "Tell me, Winnie," she asked, "has
anything gone wrong?"
My wife was a tall, slim girl, with dark eyes, dark hair parted sleekly
in the 1860 style, and a cool, slender neck. She was wearing
something low-cut in black velvet, with a white cameo brooch at the
"V" of a bodice which suggested a potentially undemure Quakeress.
I noticed that she had angry eyes, a sulky mouth and a puzzled
expression.
"I'm sorry, Jimmie," I replied, after a good look at her, "but I have
decided that I simply couldn't go through with it."
"Do you mean to say—" Dr. Rutherford began, only to be hushed by
Germaine. "Let me handle him, Jerry," she whispered. "You'd better
go. He's tight. I'll phone you in the morning."
"All right, if you say so, dear," the doctor obeyed.
"And be sure to send me a bill for this call," I added. "Professional
services and what-not. And don't come back to my house without
my personal invitation."
Dr. Rutherford emitted a muttered comment and disappeared into
the gloom of the hall. My wife followed him and I could hear a series
of confused and comforting whispers sending him on his way. I had
finished my Scotch and poured myself another before my wife
rejoined me.
"Have a drink?" I asked.
"No thank you!" she snapped.
"Mad at me?"
"What do you think?" Her tone was cool enough to freeze lava.
"You have every right to be!" That answer, I had found by
experience, was unanswerable.
"What do you mean?" she asked in some bewilderment. "Yes,
thanks, I will have a drink after all. You see, Winnie, after we had
talked it all over the other night after the Bond Rally Dance and
realized how we felt about it all, the four of us decided to be—well—
civilized about things. And now—"
"I don't feel civilized about my wife," I said, pouring her a stiff one.
Her eyes glittered and her cheek was tinged with color. In spite of
her anger, she responded to the idea of male brutes contesting for
her favor.
"I didn't think you cared a damn," she said at last, "and it's pretty
late in the day to make a change now. After all, there is Virginia."
That was the cue to clinch the situation. "To hell with Virginia!" I
announced. "I'd rather live with you as your friend than sleep with la
Rutherford in ten thousand beds. I can't help it," I added boyishly.
She leaned forward and sniffed. "You have been drinking, haven't
you?" she remarked.
"Of course I have! Today, in town, I suddenly realized what a damn
fool I'd been to throw away something really fine for something very
second-rate. So I drank. Too much. And the more I drank the more I
knew that I was right and that it was here where I belong, with you.
If you don't want me to stay, I'll go over to the Country Club for the
night. I'll even phone Jerry Rutherford for you—him and his
moustache—but I'm damned if I'll go running back to Virginia. She's
not pukka!" ("How'm I doing?" I added silently for the benefit of the
Master of Ceremonies.)
"Well—" she said, after a long pause. "Perhaps—It's so mixed up—
Perhaps you'd better go to bed here and we can talk it over in the
morning. All of us."
I shook my head. "I don't want to hold any more mass-meetings on
the state of our mutual affections. If you want that tenor tonsil-
snatcher, you're welcome to him but I'm damned if I'll be a good
sport about it. If you insist, I'll buy you a divorce, but I won't marry
Virginia—that's final!"
Germaine's face relaxed. She smiled. "We'll see how things look to
you in the morning," she said.
Now was the time to play the trump card.
"Oh yes," I said. "I brought home a present for you."
I walked over to the hanger in the corner and pulled the Tiffany
packages from my overcoat pocket.
"Here you are, Jimmie Tompkins," I said, "with all my alleged love."
"Alleged is right!" But she picked eagerly at the wrappings and
swiftly ferreted out the diamond brooch. "Why, Winnie, it's lovely—"
she began, then whirled on me, her eyes blazing. "Is this a joke?"
she demanded.
"Of course not! What's the matter?"
Her laugh was wild. "Oh, nothing, Winnie. Nothing at all. It's just
that you should have decided to give me—on her birthday—a brooch
with her initials in diamonds. See them! V.M.R."
So that's the catch, I thought. I should have guessed there would be
something wrong with the set-up and I kicked myself for not having
bothered to trace out the monogram.
"Don't you see what I mean," I grated, "or must I spell it out for
you? Some time back, when we were considering all this civilized
swapping of husbands and wives, I put in the order at Tiffany's for
Virginia's birthday present. Today, when I picked it up, the clerk
smirked at me—he knows your initials don't begin with V—and I
suddenly knew I couldn't go ahead with the whole business. So I
brought the brooch back to you as a trophy, if you want it. You can
do what you like about it. It's yours. You see, Jimmie," I added,
"that's the way things are. I'm burning all my bridges."
"Oh!" she said. Then after a long pause, she added, "Ah!"
"I don't think," she remarked, after another pause, "that I'll want to
keep this and I'm far too fond of Virginia Rutherford to humiliate her.
I think I'll just take this back to Tiffany's and get something else."
So I had led trumps.
"Here's something else to be going on with," I told her. "I got this for
you, anyhow, win, lose or draw"—and I produced the gold bracelet.
"I thought it would go with that dress and your cameo and—if you
still want to wear it—your wedding ring."
She cast quick glances from side to side, like a bird that suspects a
snare.
"It's good," she sighed. "Winnie, it's so good. I guess...."
There was a knock at the door. It was Myrtle-Mary.
"Will the master be staying for dinner, Mrs. Tompkins?" she asked.
"Of course I will, Mary," I said. "Is there enough to eat?"
"I'll see, sir," she replied in a manner which was practically an insult
to us both.
"And keep a civil tongue in your head," I added.
She handed it back to me. "And keep your hands to yourself, sir,"
she said as she closed the door.
"Winnie." It was Jimmie's hand restraining me, as I started up.
"Let her go!" I said at last. "It's my fault, I guess. I haven't been
happy and I did make a few passes. From now on, I'll try to be a bit
more decent and livable. God knows I have plenty to be ashamed of,
but nothing disgraceful ... I hope."
"So do I," my wife began. "If you...."
The telephone rang.
She picked up the receiver and listened for a moment, frowning.
"Yes, he's here," she said, passing me the instrument.
"It's for you," she observed. "It's Virginia calling from New York and
she sounds most annoyed."
 CHAPTER 3
"Winnie!" The voice that crackled at me over the wire had all the
implacable tenderness of a woman who has you in the wrong.
"Yes, dear!" I answered automatically, with a passing thought for my
own lost Dorothy, marooned in Washington with a job in the O.S.S.
"What is the matter?" the voice continued, in its litany of angry
possessiveness. "What on earth happened to you? I've been waiting
for you since three o'clock."
"Where have you been waiting?"
"Here—of course. In our place. In New York. Winnie, what's wrong?"
Not a pleasant spot to be in, even if it was only part of a trial-run in
purgatory.
"It's a bit too hard to explain, Virginia," I said, "but something came
up and I don't think I can go through with it. In fact, I know I can't
go through with it."
There was one of those pauses which make a whole life-time seem
like a split-second.
"Something came up!" The voice, now a pantherish contralto, purred
dangerously. "Something went down, you mean. You see, Winnie,
I've been talking to your friends. Johnny Walker, Black Label, that's
what went down. At the Pond Club. Tommy Morgan told me all
about it. You went to the Pond, had too much to drink, woke up
about four o'clock—one whole hour after you had promised to meet
me—and woke up talking wildly and then staggered out. Now I find
you're back in Bedford Hills, and it—it's my birthday—" The voice
ended in a choke which might have been a sob or a paroxysm of
feminine fury.
I summoned the old voice of authority, as inculcated at Quonset,
into the well-tanned vocal chords of Winfred Tompkins. "Virginia," I
commanded, "just stop making a fool of yourself. I'm sorry I stood
you up but things have been happening. I just can't go through with
it. I'll explain when I see you."
"You'd better!" And the slam of the receiver left my ears ringing.
When I turned around, my wife was smiling, with a glint in her eye
which was far from sympathetic.
"Poor Winnie!" she observed. "You'd better stick to your office
stenographers and not go picking up red-headed married women in
Westchester. You haven't got a chance."
I refilled my glass and hers, in that order—a husbandly gesture
which put me, I felt, on a solid married basis for the moment.
"Jimmie," I announced. "I don't need to tell you that I'm an awful
heel. Now that we've got the wraps off I wish you'd tell me what you
really think of me and Virginia."
Mrs. Tompkins' nostrils flickered slightly. "I never cared for bulging
red-heads myself," she said. "When she was at Miss Spence's we
called her Virgin for short, but not for long. There never was a thing
in pants, up to and including scarecrows, that she wouldn't carry the
torch for. When she married Jerry Rutherford it was a great relief to
her relatives. She had no friends."
"A very succinct summary, for all that it should be written in letters
of fire," I remarked. "And now what do you think of me?"
She took a long sip of her drink and leaned forward. "You're fat, soft
and spoiled, Winnie, physically, mentally and morally," she began,
"and you know it. If you weren't so stinking rich you'd—well, I don't
know. There's something about you that's—Well, after you bought
me from my parents, I wanted to kill myself and then I sized you up.
There's no real harm in you, Winnie, it's not hard to like you, but you
never were love's young dream."
"What you say is absolutely on the beam," I admitted. "But while
we're on the subject I wouldn't call Jerry Rutherford the answer to a
maiden's prayer. That Hollywood doctor type with the swank
suburban practice and the soft bedroom manner gets me down. He
has only three ideas in the world and all of them begin with 'I'. After
the first antiseptic raptures you'd have nothing in common but your
appendix and he'd want to get away with that—for a consideration."
Jimmie giggled. "You forget that he already has it," she said. "That's
how I was first attracted to him, under the ether cone. I was sick as
a dog and he held my hand and told me I was being very brave."
"And sent the hell of a bill to me," I added.
"Well," she asked, after a pause. "What do you really think of me?"
"I think, Jimmie, that you're lonely, bored and unhappy. All three are
my fault but they are driving you to make a fool of yourself. Nobody
has tried to understand you"—which is catnip for any person of
either sex, once you get them talking about themselves—"least of all
your husband. You need what other women need—children, a
home...."
"If this is a build-up for obstetrics, the answer is 'No!'" she snapped
angrily.
"Skip it!" I urged. "I'm telling you the truth, not making a pass at
you. We can talk some more about you in the morning. In the
meantime, I think I'll turn in. I'm very tired, a little tight and I've had
a lousy day."
She flashed me a curious look. "Go on up, Winnie," she said. "I'll put
these things away. You'll need your strength for the morning, if I
know Virginia Rutherford."
Guided by luck and the smell of pipe tobacco, I found what was
obviously the Master's Room—with a weird amalgam of etchings of
ducks and nude girls, including one Zorn, and all the gadgets for
making sleep as complicated as driving an automobile.
I was awakened in the morning by a hand on my shoulder. It was
Mary-Myrtle.
"You'd better get up and put on your pyjamas and dressing gown,"
she remarked conversationally. "Dr. Rutherford is downstairs and
Mrs. Rutherford is talking with Mrs. Tompkins in her bedroom."
"Stormy weather?"
"I'll say so—and see here—" she began.
"Sit down, Mary!" I ordered.
She subsided on the edge of the bed and looked at me rebelliously.
"From now on, Mary," I announced, "things are going to be different
around here. I won't refer to what is past, because you're old
enough to know what you're doing and so am I. If you want to stay
on and really help me through a hard time, I'll double your wages. If
you'd rather go—and I wouldn't blame you—I'll pay you six months
wages in advance and you can clear out. But I can't be worried
about you and your feelings when I have a big problem to clean up
here. Will you go or stay?"
The girl thought for a moment, then rose, straightened her apron
and gave me the first friendly smile I had received, since my arrival
from the Aleutians.
"I'll stay, Mr. Tompkins," she said. "And here's a pick-me-up I mixed
for you. Better drink it before you see the Rutherfords."
"Okay!" And I drank it and it worked its beneficent will upon me.
"Now I'll go and kill Dr. Rutherford, if you'll toss me my flit-gun and,
thanks!"
Dr. Rutherford was pacing, with surgical precision, up and down my
den. He looked slightly more self-possessed than the day before and
seemed to be in excellent physical condition. I guessed at the
contour beneath my wadded black silk dressing gown and re-
considered my original plan to throw him bodily out of the house for
having come without my invitation.
"See here, Tompkins," he said briskly. "We're both men of the world,
I hope. Things can't go on like this. I was up all night with Virginia.
You're not behaving at all well, you know, old man."
I sat down in the corner of the leather lounge and looked up at him
—a move which gave me a slight advantage of position in dealing
with the higher emotions.
"Let's not mince words, Jerry," I said. "Suppose you just state frankly
what you think we should do."
"Germaine loves me and does not love you," Rutherford stated
crisply. "You love Virginia and she loves you. None of us wish a
divorce. Hang it all, Winnie, we're civilized. These things happen,
you know, and we might just as well face them. We agreed that the
four of us should do as we liked, and no hard feelings."
I sighed. "Jerry," I said. "What you say was true as of yesterday
noon but if these things can happen, they can also un-happen.
Whatever you and my wife decide to do is your own affair but I'm
damned if I intend to allow her to use my home as a place of
assignation and I'm damned if I'll let her become the subject of
gossip. So far as Virginia is concerned, whether or not she is in love
with me, I'm no longer in love with her and I'm damned if I'll play
gigolo to spare the feelings of a bulging red-head who carries the
torch for anything in trousers, up to and including scarecrows—
myself included."
"I can't allow you to talk that way about my wife, Tompkins. It's
rotten bad form and anyhow we both know that people are the way
their glands make them and nothing can be done about it."
"Here, have a drink!" I suggested. "This is all under the seal of a
confessional. I'm not quarreling with you. I'm consulting you. I don't
love Virginia and I don't believe I ever did. If you wish to wriggle out
of your marriage, that's your affair."
"And it's yours, too, ever since that night at the War Bond Ball," he
said. "Don't forget that I caught you—"
"Rutherford," I replied. "As a medical man you have surely seen far
worse than that. You can't sue me for alienation of affections,
because all Bedford Hills is aware of Virginia's glands and because it
wouldn't help your practice. For the rest, I'm willing to listen to
anything as a way out of this mess."
He paused in his precise pacing. "The four of us will have to talk it
over," he said, "as soon as I have that drink you offered me."
"Okay," I agreed. "The girls are in Jimmie's bedroom. Perhaps you
know the way better than I do. I'll follow your lead."
Germaine was propped up in a frilly four-poster bed amid a wallow
of small satin cushions. I barely had time to notice that she was
wearing a rather filmy night gown, when I turned to reap the whirl-
wind in the form of five foot six of red-haired determination and
curves.
"Now, Winnie," she commanded. "What's all this nonsense?"
I caught a tell-tale glimpse of uncharitable diamonds at my wife's
breast and hastily averted my eyes from the monogram.
"Virginia," I replied, "There's nothing wrong. Nothing at all. It was
just that yesterday I realized that I couldn't go through with it. I
don't pretend to be moral but I won't go in for mixed-doubles at my
age. It's undignified."
"What!" Mrs. Rutherford's mouth hung open in amazement.
"Only this, Virginia. Whatever I have been in the past, I'm going to
try to be different in the future. I know it's hard on you but—"
The red-head laughed like tumbrils rolling to the guillotine. "Nothing
to what a breach of promise suit would be to you, Winnie dear. Don't
forget I have your letters."
"Now we're getting somewhere," I remarked. "How much?"
"Winnie!" my wife gasped. "It's blackmail!"
"Of course it's blackmail," I agreed, "and there are times when it's
wiser to pay than to fight. This is not one of them. Virginia, I'm not
interested in buying back those letters. Save them for a rainy day.
I'm going to settle with your husband. How about it, Jerry?"
"You swine!" Mrs. Rutherford was going definitely Grade-B in the
pinches. "Do you think that you can drive a wedge between me and
my husband?"
"No, my wife has already done that for me. He loves her and he tells
me that she loves him. I've told him that they're welcome to a
divorce but I won't have my house used for any hanky-panky and
won't have people gossip about Germaine. They can make up their
minds what they want to do about it."
"You were saying downstairs, Tompkins," the doctor hastily
interrupted, "that you would listen to any reasonable offer."
"Check! What's your price?"
"I want out," said Dr. Rutherford. "Lend me the value of a year's
practice—fifteen thousand would cover it—and I'll get in a substitute
and take a crack at the Army Medical Corps. They've been after me
for a couple of years."
"Done!" I said, "and if you like I'll have the bank dole it out to
Virginia while you're gone, so she won't use it up too fast."
"What about me?" asked my wife. "I thought Jerry said he loved
me."
"What's your price?" I asked.
Germaine yawned and the shoulder strap of her gown slipped
indiscreetly. "Since nobody seems to want me," she declared, "I'm
going to stick around and see the fun. I wouldn't miss the sight of
Winnie Tompkins trying to lead a changed life for all the doctors in
the Medical Corps."
"Me too!" spat out Mrs. Rutherford. "There's something pretty
mysterious going on here and I'm going to stay until I learn all the
answers."
There was a tap at the bedroom door and Myrtle appeared, pulling
two neatly set breakfast trays on a rubber-tired mahogany tea-
wagon.
"I thought you would rather have your breakfast upstairs with the
Master, mam," she remarked primly, in a far too English country-
house manner. "Breakfast is waiting for Dr. and Mrs. Rutherford in
the dining-room," she added.
And as she bent over the table and began to straighten out the
breakfast things, the girl had the impudence to slip me a wink.
 CHAPTER 4
After a pleasant breakfast, in the course of which my wife read the
social news in the New York Herald-Tribune and I the business news
in the New York Times, I excused myself and returned to my
bedroom. Winnie's bathroom was fitted with all the gadgets, too,
and there was an abundant choice of razors, from the old-fashioned
straight-edge suicide's favorite to the 1941 stream-lined electric
Yankee clipper. I tried out the scales and found that my involuntary
host weighed over 195 pounds—a good deal of it around the middle.
Oh, well, a few weeks of setting up exercises would take care of
that. A cold shower and a brisk rub made me feel a little more
presentable and I climbed shamelessly into Winnie's most manly
tweeds.
"Are you catching the ten o'clock, dear?" Germaine called from her
bedroom.
"No such luck!" I warned her. "Phone the office, will you, and tell
them I'm feeling under the weather and won't be in till sometime
tomorrow."
This seemed like a good chance to do some exploring—since the
Rutherfords had temporarily abandoned the field—though I needn't
have bothered since I had seen photographs of suburban houses like
Pook's Hill in a score of different slick-paper pre-war magazines.
There was the inevitable colonial-type dining-room, with dark
wainscoting below smooth oyster-white plaster, electric candle-
sconces, and the necessary array of family silver on the antiqued
mahogany sideboard. The windows gave a vista of brown lawn, with
the grass still blasted by winter. There was the inevitable chintzy
living-room, with a permanently unemployed grand-piano, two or
three safely second-rate paintings by safely first-rate defunct
foreigners. There was the usual array of sofas, easy chairs, small,
middle-sized and biggish tables, with lots of china ash-trays, and a
sizable wood-burning fireplace. Of course, you entered the living-
room by two steps down from the front hall and there was a
separate up-two-steps-entrance to my den. And sure as death and
taxes, there was a veritable downstairs lavatory.
I slipped on my coat and hat and stepped out through a French
window which led from the living-room to the inevitable paved stone
terrace. There were galvanized iron fittings for a summer awning
and in the center was a cute little bronze sun-dial. This had an
exclamation point and the inscription, "Over the Yard-Arm" at the
place where noon should be, and a bronze cocktail glass instead of
the sign for four p.m. All the way around the rest of the circle was
written in heavy embossed capitals, "The Hell With It!"
My meditations on this facet of the Tompkins character—and I
wondered whether I oughtn't to spell 'facet' with a u'—were
interrupted by Myrtle.
"Oh, Mr. Tompkins," she called from the kitchen window, in complete
repudiation of her earlier appearance as Watson, third lady's maid at
Barony Castle, "the man from the kennels is here with Ponto. Where
shall I tell him to take the dog?"
I hurried back indoors—there was still a chill in the air and I really
prefer my trees with their clothes on—and found a gnarled little man
who reeked of saddle-soap and servility.
"Well, sir, Mr. Tompkins," he beamed the Old Retainer at me. "That
dog of yours had a close call, a mighty close call. Thought he was a
sure-enough goner. Tried everything: injections, oxygen, iron lung,
enema. No dice. Then yesterday afternoon he just lay down and
went to sleep and I thought, 'My! Won't Mr. Tompkins feel bad!' But
he woke up, large as life and twice as natural, and began carrying
on so that I guess he wanted to come home to his folks. He's a mite
weak, Mr. Tompkins, very weak I might say, but he'll get well quicker
here than at my place and I'll pop in every other day to keep track of
him. Never did see anything like the recovery that dog made in all
my born days. Now about his bowels—"
I waited until he had to draw a breath and made swift to
congratulate him on his professional skill. "I wouldn't have lost Ponto
for a thousand dollars," I said. "Let's get him out of your car and up
in my bedroom," I added. "He's been like a member of the family
and—"
A series of deep bass backs interrupted me, followed by ominous
sounds of a heavy body hurling itself recklessly around inside a small
enclosed space.
"There!" said the vet. "He recognized your voice. Come on, Ponto.
I'll fetch you. He's pretty weak, Mr. Tompkins, but he'll get strong
fast if you feed him right."
The vet twinkled out the front door and returned shortly, leading a
perfectly enormous coal-black Great Dane on a plaited leather leash.
Ponto did not look very weak to me, but I've always been fond of
dogs and I figured that kindness to animals might count in my favor.
"Good dog," I condescended. "Poor old fellow!"
The poor old fellow gave a low but hungry growl and lunged for me
with bared teeth, dragging the vet behind him like a dory behind a
fishing schooner. I jumped into the den and slammed the door, while
Ponto sniffed, snapped and grumbled on the far side of my
defenses.
"Tell you what, doctor," I called through the panels. "Take him
upstairs and put him in my room. It's the one to the right at the
head of the stairs. He's just excited. Shut him in and as soon as he's
calmed down I'll make him comfortable."
While this rather cowardly solution was being put into effect, I sat
down and thought it over. Apparently Winnie had been the kind of
man whose pet dog tried to rip his throat out. That was puzzling,
since from what I remembered of him at school, he had if anything
been only too amiable. I waited out the vet's last-minute report and
instructions, and then rang the bell for the maid.
"Mary," I said, "will you help the doctor with his hat and coat and
then take Ponto a bowl of water. The poor old fellow's had a rough
time."
The vet departed and I listened while the maid went upstairs. Then
there was a scream, the crash of breaking china and the sound of a
door being slammed. I bounded up the steps to find Mary, white-
faced and trembling, looking stupidly at the broken remains of a
white china bowl and a sizeable puddle of water on the hardwood
floor outside my bedroom.
The door of my wife's room burst open and Jimmie appeared with a
wild "What on earth!"
"It's that dog, sir," gasped Myrtle. "When I come—came—in with the
bowl of water like you said, there he was lying on—on—your bed,
like a Human, and—and—"
"And what?" I demanded.
"And he was wearing your pyjamas, sir," she sobbed. "It's—it's—"
"Uncanny," Germaine supplied the word.
I gave a hollow laugh. "He probably remembers that he isn't allowed
to lie on the beds, Mary, and may have dragged my pyjamas up
there to lie on. Whenever I let him up on the furniture I always
make him lie on some of my clothes."
"Oh," Myrtle said, suddenly calm. "Is that it? It was just that it
looked sort of queer to see his legs in the pyjama trousers."
"Well, don't worry about it now, Myrtle," my wife remarked firmly.
"I'm not surprised it gave you a shock. He's such a big dog. I'll go in
and see that he's comfortable. Come on, Winnie! Let's take a look at
him. What's the matter?" she added, noticing a certain reluctance in
my attitude.
"Nothing much," I martyrized. "It's only that he flew for my throat
when he got inside the door."
"Nonsense!" she replied in the firm tone of a woman who knows
better and who, in any case, expects her husband not to be afraid of
a mere infuriated Great Dane. "You know Ponto always puts his
paws on your shoulders and licks your face every morning, as you
taught him."
My rollicking laughter was a work of art. "Of course, that was it," I
agreed, "and he'd been away from us so long that he was over-
eager. Come on, let's see if we can't make the poor beast
comfortable."
But I let her lead the way.
The poor beast was lying panting on my still unmade bed. The
flowered Chinese silk pyjamas which I had worn at breakfast were
indeed strangely twisted around its gaunt body. The coat was across
the animal's shoulders and both of its hind-legs were sticking
through one of the trouser-legs.
"There! Ponto! Poor old fellow!" cooed Jimmie in a voice which
would have charmed snails from their shells.
Ponto gave a self-pitying whine and his tail thumped the pillow like
an overseer's whip across the back of Uncle Tom. My wife patted the
animal's head and Ponto positively drooled at her. She gently
disentangled him from among the pyjamas and hung them up in the
closet. As she turned toward the bed, he jumped to the floor, reared
up, put both paws on her shoulders and licked her face convulsively,
giving little whines and shiverings.
"Poor old fellow, poor old Ponto!" she crooned. "Was he glad to get
home from the nasty old kennel? There!" And she massaged his
ears. "Come on now, Ponto," she remarked more authoritatively,
"say good morning to your master."
The answer was a grand diapason of a growl and the baring of a
thicket of gleaming white fangs in my direction.
"Ponto!" she ordered, as the beast positively cringed. "Say good
morning to the master!"
He slumped to the floor with the grace of a pole-axed calf and
approached me slowly, ears back, hair bristling and teeth in
evidence.
"Ponto!" Germaine's cry was positively totalitarian but the dog
lunged at me and I barely had time to close the door in its face.
A few minutes later, Germaine emerged looking bewildered. "I've
never known him to behave like this," she said. "I don't like it. It's
always been you he was so fond of and he barely tolerated me. Now
he seems all mixed-up. After you left, he calmed right down and
came back and licked my face all over again. What do you suppose
is wrong with him. Can it be fits?"
I shook my head. "He doesn't act like fits," I said. "He's had a bad
go of distemper and is probably suffering from shock. Dogs do get
shock, you know. I remember in Psychology at Harvard they told us
about a very intelligent St. Bernard dog which was shocked into
complete hysteria by the supernatural. That is, they pulled a lamb
chop across the floor by a thread concealed in a crack between the
boards. The dog nearly had heart failure when he saw a chop
moving by itself."
"But what can we do?" she asked. "Let's send him back to the
kennels until he's cured."
"Nope! From what Dr. Whatsisname—"
"Dalrymple."
"From what Dalrymple said, he'd started acting up at the kennels
and he—the vet, that is—thought Ponto would be better off at
home."
"But we can't have him going for you every time you use your
room."
"Then I won't use it. I'll sleep in the guest-room," I added swiftly,
lest she leap to feminine conclusions. "You might take him another
bowl of water—he's all right with you—and spread the New York
Times on the floor—and a damned good use for it—and bring out my
clothes and things. He seems to have quite a leech for you and we'll
just leave him there to think things over by himself."
"How about his food?" she asked. "Shouldn't he have a special diet?"
"No. I'll let him go hungry for a day or so. So long as he has plenty
of water it won't hurt him. Then when he's weak enough so as not
to be dangerous I'll bring him some nice dog-biscuits and warm milk
and he'll learn to love me the best way, by the alimentary canal."
She looked at me closely, "You do look rocky," she said. "You've had
a shock, too. Hadn't I better call the doctor?"
I shook my head. "No more doctors, please. I'm out of condition, I
guess, and all this dodging Great Danes is hard on the nerves. I'll go
down and mix myself a brandy-and-soda. You might join me when
you've moved my things upstairs. We've got to talk over a lot of
things."
When I finally managed to settle down in my den with a stiff drink I
felt besieged, bewildered and backed up against the wall. There
could be no reasonable doubt about it—the dog knew! Ponto knew
that I was an interloper, that the real Winnie Tompkins no longer
existed, that a stranger was masquerading in his body and clothes.
The uncanny instinct of a dog had led him to the truth when even
Winnie's wife had been deceived.
This was a new twist in the maze. I couldn't imagine the Master of
the Rat-Race watching with scientific detachment to see whether
Frank Jacklin would make it or would be disqualified in the first
round. Of one thing I was certain, unless I could establish some kind
of personal understanding with Ponto, suspicion would gather
around me. For the moment, Germaine did not doubt that I was her
husband: my conduct had puzzled her but she had lived with Winnie
so long that it was probable that she no longer specifically noticed
him. Virginia Rutherford would be more dangerous—she was a
woman scorned and she had been tricked out of an intrigue. She
had every motive for digging out or even for inventing the truth, but
I had given myself a good excuse to keep her at arm's length. She
couldn't force her way into my clubs. I would tell my office staff to
keep her away from me, and she couldn't be so ill-bred as to thrust
herself into my home. If I could appease Ponto and avoid Virginia, I
had a fair chance of getting away with it.
"Beg pardon, sir!" It was Myrtle.
"Yes, Mary?"
"Mrs. Rutherford is back, sir. She wants to see you."
"Tell her I am not at home," I replied in a clear carrying tone. "And
that I never will be at home to her."
"Oh, yes, you will." It was the red-head. She was wearing a long
mink coat and carrying a short automatic pistol. "Like it or not,
Winnie, we are going to have a talk—now." She turned to the
startled maid. "And don't you try phoning the police, Myrtle," she
added, "or the first thing you will hear is this pistol going pop at Mr.
Winfred Tompkins of New York City and Bedford Hills."
"That's all right, Mary," I added. "Don't call the police. Tell Mrs.
Tompkins that I'm busy. Mrs. Rutherford and I wish to have a
conversation."
 CHAPTER 5
As the door to the room slammed convulsively behind Myrtle, Mrs.
Rutherford relaxed, laid the automatic on the sofa between us, and
flung back her mink coat. She was an appetizing little number, if you
like 'em red-haired, well-developed and mad through and through.
Instinctively I started to reach for the gun but was checked by her
laugh.
"Take it, by all means," she said. "It's not loaded. I only needed it for
the maid. Tell me, Winnie, have you got her on your string, too? The
maid made or undone, as they used to say."
"Virginia," I said firmly, "I told you earlier this morning that we were
through. There's nothing more to be said about it. It's finished,
done, kaput! All's well that ends."
She laughed again, and looked at me closely. In spite of myself, I
began pulling nervously at the lobe of my left ear, a habit of mine
when confused which has always irritated my Dorothy.
"There!" Virginia said finally, "that's it!"
Her voice had a note of finality with a touch of total triumph that I
found disturbing.
"Well, have you anything to say?" I asked.
"Have you anything to say?"
"I've already said it, Virginia. Nice as you are and beautiful as you
are, we're washed up. It won't work and we both know it. So why
not shake hands and quit friends?"
She took my proffered hand in hers but, instead of shaking it,
examined it carefully.
"Very clever," she murmured. "You've even got that little mole at the
base of your thumb."
"Of course I have. It's been there since birth."
"Very, very, clever, Winnie," she continued, "but it won't do, my
Winnie, because you see you aren't my Winnie at all. You're a total
stranger."
"I've changed," I admitted. "I'm trying to be half-way decent."
"Whoever wanted Winnie to be half-way decent?" she mused.
"Nobody. He was much pleasanter as he was—a rich, friendly boob.
As for you, whoever you are, I'm on to your game. You aren't
Winfred Tompkins and you know it."
I put some heavy sarcasm into my reply. "How did you ever guess,
Mrs. Rutherford?"
She laughed airily, helped herself to a cigarette and leaned forward
while I lighted it so that I could not help seeing deep into the
straining V of her blouse.
"Lots of things. In the first place, you call me 'Virginia' when we're
alone instead of 'Bozo' as you always used to do."
"I stopped calling you 'Bozo' when I made up my mind—" I began.
"Nuts to you, Buddy," she rejoined. "Then you kept pulling at your
ear as though you were milking a cow, while I was needling you.
Winnie never did that. When he was in a spot, he always reached in
his pocket and jingled his change or, as a desperate measure,
twiddled his keys."
"Don't judge my habits by my hang-overs," I insisted. "I'm not
feeling well and I've had a sort of psychic shock."
"Winnie never said 'psychic' in his life, poor lamb," she observed.
"He didn't know what it meant. No, I don't know what your game is
but I'm on to you and we're going to be real buddies from now on or
—"
"Or what?"
"The police," she observed quietly, "take a dim view of murder in
this state. Now I'm willing to be broad-minded. Winnie was a louse
who had it coming to him, I guess. I was playing him for a quick
divorce and marriage. Three million dollars is a lot of money, even in
these days, and it would have been nice to have been married to it.
But it's even nicer this way, I guess."
The decanter was within reach. I poured myself another drink.
"Have some?" I asked.
"And why not? What's yours is mine, and we both need it."
"Why did you say it was nicer this way, Mrs. Rutherford?" I inquired.
"Virginia to you, Winnie. It's because now I don't have to marry you
and I still have a pipe-line to the Tompkins millions."
"So you are going in for blackmail," I observed. "Suppose I
threatened to divorce Jimmie and marry you. After all, I still could."
"A girl has her pride," she murmured. "Not that I'd mind having fun
with you, Winnie—as I think I'd better call you. But a wife can't give
testimony against her husband and I think I'd rather like to be able
to give testimony if needed. Besides, a husband has too many
opportunities to help the undertaker. There are accidents in bath-
tubs and garages, medicines get mixed up in the bathroom cabinet
and there is always the old-fashioned hatchet. No, since you've
managed to get rid of the other Winnie, somehow, I think I'll keep a
safe distance and my silence, as long as you make it worth my
while."
"Suppose I won't play?" I suggested.
"Then I'll go to the police or the F.B.I.—they're supposed to catch
kidnappers, aren't they?—and tell them what I know."
I stood up. This would be easier than I had expected.
"Okay, Virginia," I said, "go right ahead. There's the telephone. You
can use it to call the Secret Service for all I care. See what luck you
have with your story, when my wife is here to testify that I'm Winnie
Tompkins."
Her face paled and her eyes narrowed angrily. "Jimmie too?" she
asked. "Then you're both in it!"
"We're both in what?"
The door opened and Germaine Tompkins stood in the entrance.
Virginia Rutherford looked trapped and she instinctively pulled her
mink back over her shoulders.
"Nothing, Jimmie," she said at last. "I was foolish enough to hope
that if I came back and had a talk alone with Winnie, we could pick
up where we left off. He's been acting so strangely that he doesn't
seem like himself at all. And so are you. That's what I meant by
saying that you were both in it."
"Virginia," my wife said firmly, "my husband told you to stay out of
this house—and it's my home, too—and now I find you here. Please
go or I'll call the police."
The two women exchanged appraising glances which suggested that
they were both thoroughly enjoying the touch of melodrama that
had come into their well-fed lives.
"No, it's my fault for letting her in," I said. "She sent in word by Mary
—"
"You mean Myrtle."
"—that she would like to see me. I agreed to do so, so you can't
blame her. We talked things over and decided that it's all off—a few
moments of madness, but that's all, and not worth wrecking two
marriages for. Isn't that so, Mrs. Rutherford?"
Virginia shook her head. "No, Winnie, it is not so. Jimmie, I came
here with that gun. It wasn't loaded but the next time it will be. I
made Myrtle or whatever her name is show me in and I told her I
would shoot Winnie if she gave the alarm. Then I told him what I
know about him."
"And what is that?" my wife asked.
"That he is not Winnie at all," Virginia declared. "That he is an
imposter, that he and perhaps you had done away with poor old
Winnie. I told him that I wouldn't tell his secret if he paid me to keep
silent. And he told me to call the police."
My wife went over to her and took her hand. "Poor, darling Virginia,"
she murmured, "why don't you go away and have a good rest?
You've got yourself all worked up for a nervous breakdown. Of
course it's Winnie. I'm married to him and I ought to know my own
husband, shouldn't I? You've simply got run down and all, with
rationing and war-work. Why don't you let Jerry send you for a few
weeks to the Hartford Sanctuary for psychoanalysis and a good
rest?"
Virginia dashed my wife's hand away. "In other words, you think I'm
crazy!" she snapped.
"No, but I do think you're hysterical. This is Winnie, I'm Jimmie and
you're Virginia Rutherford. We've all been letting ourselves get over-
emotional and this war is a strain on everybody. Don't worry. Jerry
can fix it for you quite easily and I—we both will be glad to help pay
for it, if you're worried about the money. After all," Germaine added
wryly, "the whole thing is pretty much of a family affair, isn't it? Let's
keep it that way."
Mrs. Rutherford reached over and grabbed the gun from the sofa.
"All right, Germaine Tompkins, murderess," she grated. "If that's the
way you're going to play it, I'll play too. Don't worry about my mind.
Start thinking about the electric chair. Remember, in this state they
execute women who kill their husbands."
Jimmie waited until the door closed behind the doctor's wife. Then
she turned to me with a curious expression of weariness.
"Poor man!" she remarked. "You have got yourself into a bad mess,
haven't you?"
I nodded.
"It didn't seem like one while I was getting into it," I said. "It's only
now when I'm trying to get things straightened out that it seems so
awful."
"Let's see," she continued. "How many women is it you've been
trying to keep away from each other? There's myself, of course, but
wives don't count any more, do they? And there's Virginia Rutherford
and Myrtle, and there was that blonde actress we met at Martha's
Vineyard last summer, and is it one or two girls at the office?"
Here was where I could object with complete sincerity. "I swear that
I've not been fooling with any of the office girls," I said.
"I know," Jimmie agreed wisely. "You always used to tell me that it
was considered bad for business to play with the help but after I
saw the way you went for Myrtle I decided that there were
exceptions to every rule."
"Nobody in the office," I repeated. "I swear it."
"Then perhaps it was the office next door. Maybe you brokers have
an exchange system for taking on each other's stenographers—
charge it to business expenses for getting information about each
other's dealings—but I know I've heard the name Briggs mentioned
somehow in your connection."
"The name means absolutely nothing to me," I insisted. "If it will
make you any happier I'll admit to a hundred women but I'm
through with all that sex-stuff. From now on, I'm going to be a one-
woman man."
Germaine faced me with an air of resolution. "Would you mind giving
me a drink of brandy?" she asked. "I've something to say to you and
I'm afraid you won't like it."
I went to the portable bar and poured her a pony of Courvoisier.
"Here you are. Down the hatch! And now what is it you want to tell
me."
"Believe me, Winnie," she said, "it's not easy for me. But I'd better
say it anyhow. I can't keep on suppressing it. Who are you?"
"What's that?"
"Who are you?" she repeated. "You look like my husband but you
don't talk like him. His clothes fit you but Virginia Rutherford is quite
right—you aren't Winnie Tompkins."
"How did you guess?"
"Don't think I'll give you away," she continued. "I won't because you
must have had a terribly important reason for doing whatever you
have done. You seem to be in deep trouble of some kind. I—I'd like
to help you, if I can. Don't think I'm hard on my husband. It's been
years since we—oh, you know. I married him for his money and I
still don't know why he married me. Yes, I do, but I've never liked to
admit it. He'd made a lot of money in the market and had built this
house. He needed a wife the way he needed an automobile, a
portable bar, a Capehart, a thoroughbred Great Dane and a
membership in the Pond Club. I was available, at a price, which he
met—but that's all there is to our story."
"Poor Jimmie!" I sympathized. "We're both lost, I guess. No, I'm not
Winnie but I don't know who else I could possibly be. You see, less
than twenty-four hours ago I was a lieutenant-commander on a light
carrier in the North Pacific and—"
Germaine slowly withdrew her hand from mine.
"Oh!" she exclaimed softly. "Oh Winnie! Poor old idiot! I'll take care
of you and see that you get over this. Wait, I'll call the doctor right
away. The Hartford Sanctuary's a very nice place, and I can come
over every week to—"
I shook my head. "You'll do nothing of the kind, my dear," I ordered.
"No doctor can help me on this one. Besides," I added, "how do you
know that I wasn't batty before and have just come to my senses."
Her eyes were frightened. "All right, dear," she agreed. "I like you
better this way, anyhow."
 CHAPTER 6
"Thanks, Jimmie," I replied. "I'm going to try to stay this way."
My wife sat down beside me and studied me closely. "You look
different," she remarked. "To me, at any rate. You're sort of coming
to a focus. If only—. You're so different and—strange."
Here was my chance to recover lost ground.
"As near as I can make out," I said, "I've had a kind of amnesia. I
know you, of course, and my name, and that this is my house and
that Ponto is my dog, even though he tried to bite me. I know the
Pond Club and the Harvard Club, but that's about all I seem able to
remember. I can't recall where I work or where I bank, or who my
friends are or what kind of car I drive or what I was doing before
yesterday afternoon."
She relaxed at the holy scientific word 'amnesia,' as though to name
a mystery explained it.
"But you were saying something about being on an aircraft carrier in
the Pacific," she objected.
I laughed. "That must have been part of a very vivid dream I was
having in a chair in the bar at the Pond, when Ranty Tolan woke me
up. It was one of those dreams which seemed so real that real life
seemed like a dream. It still does a bit. That's where my alleged
mind got stalled and I'm still floundering around. Help me, won't
you?"
"You didn't seem to need much help remembering Virginia
Rutherford," she remarked, "but I'll try to fill in some of the gaps for
you. You have your own firm—Tompkins, Wasson and Cone—at No.
1 Wall Street. It's sort of combination brokerage office and
investment counsel. You once told me that your specialty was finding
nice rich old ladies and helping them re-invest their unearned
millions. You bank at the National City Farmers and your car is a
black '41 Packard coupe."
"That helps a lot," I thanked her. "Now how about my friends? If I
go to town tomorrow, I ought to be on the look-out for them.
Business isn't so good right now that I can afford to let myself be
run in as an amnesiac while my partners look after the loot."
She frowned. "I don't know much about your friends in town, since
so many of them are in the war," she admitted. "There's Merry Vail,
of course, who roomed with you at Harvard, but he hasn't come out
here much since Adela divorced him after that business in Bermuda.
Sometimes you talk about the men you see at the Club but I've
never been able to keep track of the Phils and Bills and Neds and
Joes and Dicks and Harrys. You'll have to find your own way there.
At the office, of course, there's Graham Wasson and Phil Cone, your
partners, but you won't have much trouble once you're at your desk.
Wasson is dark and plump and Cone is fair and plump and they're
both about five years younger than you are."
"The office doesn't worry me," I agreed. "I can handle anything that
develops there."
"You know, Winnie," Jimmie remarked, "if I were you I wouldn't try
to go to town for a few days. The office will run itself and you need
a rest. I don't know much about amnesia but I've always heard that
rest and kind treatment—"
"Uh-uh!" I dissented emphatically. "Worst thing in the world for it.
I've always heard that the thing to do is to go back over the ground
until you come to the thing that gave you the original shock and
then it all comes back to you. If I stick around Bedford Hills I'll just
get panicky over not being sure whether I remember things or not.
I'll go to town in the morning and see if I can't find myself."
She laughed, as wives laugh. "You may be a changed man," she
announced, "but you're still stubborn as a mule. Tell me, to change
the subject, you say that you remember me. Tell me what I seem
like to you, now that you've changed, as you say, aside from age,
sex, scars and distinguishing marks, if any, and marital status."
I closed my eyes and thought of Dorothy as she had been that last
night in Hartford before she walked out and I decided to join the
Navy as a Reserve Officer.
"You are piano music on a summer night—something Scarlatti or
Mozart—thin, cool, precise, gay. You are apple blossoms against a
Berkshire hillside. You are the smoke of fallen leaves climbing into
the cool October sky. You are surf on a sandy beach, with the gulls
wheeling and the white-caps racing past the lighthouse on the point.
You are bobsleds and hot coffee and dough-nuts by a roaring wood
fire. And you're a lost child, with two pennies in your fist, looking in
the window of a five-cent candy-shop."
Germaine relaxed. "Except for that last bit, Winnie, you made me
sound like a year-round vacation resort or an ad for a new
automobile. You've mentioned almost everything about me except
the one thing I obviously am."
"Which is?"
"A simple, rather stupid woman, I guess," Germaine sighed, "who's
had everything in life except what she wants."
"All women are simple," I pontificated, "since what they want is
simple."
"You moron!" she blazed. "Don't you see that no woman knows what
she wants until she is made to want it. You ... you never made me
want anything simple, except to crack you over the head with
something."
After she had left, I sat for a long time. There seemed to be nothing
to do or say. Winnie's domestic life was still in too much of a snarl
for me to do the obvious thing and follow Germaine upstairs, and
into her bedroom, lock the door, and kiss her tear-stained face and
tell her that I was sorry I had hurt her.... Before it would be safe to
accept her gambits I must first explore my business connections.
Hadn't my wife said something about girls in the office?

My first stop in the morning, after I had been careful to take a late
commuting train in to the city in order to avoid business men who
were sure to know and greet Winnie Tompkins, was the Pond Club.
Tammy was behind the bar and as soon as I entered he turned and
mixed me a powerful pick-me-up. I drained it with the usual
convulsive effort and then pretended to relax.
"Thanks, Tammy," I said. "That's what I needed." "Good morning,
Mr. Tompkins," he remarked. "I'm glad to see you back. You were
looking a trifle seedy—if you don't mind my saying so, sir—when you
were in here Monday afternoon."
"I took a day off in the country and got rested up," I told him. "I feel
fine now. Anybody in the Club?"
"Not just now, sir. A couple of gentlemen were asking for you
yesterday afternoon—that would be Tuesday. That was Commander
Tolan, sir, and a friend of his, a Mr. Harcourt his name was, who
hasn't been here before. They asked me if you were at your home
but I just laughed. 'Him gone home?' I said. 'Not while he has a girl
and a flat on Park Avenue.' Begging your pardon, Mr. Tompkins, I
knew you didn't want to be bothered wherever you were and so I
said the first thing that came to my head."
"You're doing fine, Tammy," I assured him. "I don't want to see
anybody for a couple of days. Now then, I'd like you to tell me what
happened here Monday afternoon. It's the first time in my life I've
ever drawn a complete blank."
"Well, sir," the Club steward recited. "You came in about two o'clock
and sat down in your usual chair—that one in the corner. You said
something about having had lunch at the Harvard Club, sir, and had
a couple of Scotch and sodas here."
"Was I tight, Tammy?"
"Not to call tight. You didn't show it, and after a time you went to
sleep, like you was tired out. You was still sleeping when Mr. Morgan,
Mr. Davis and Commander Tolan came in. That would be a little after
three o'clock, sir. They made some talk about how you were sleeping
through the noise they made, that it would take a bomb to wake
you. Then, sir, I guess you had some kind of a dream. You began
talking like and thrashing with your arms and making noises. So
Commander Tolan he said, 'Jesus we can't drink with that going on'
and went and shook you by the shoulder until you woke up. You'd
been dreaming all right, Mr. Tompkins, because you talked wild when
you woke up, about Alaska and where were you. The others joked a
bit about it after you left but I'd take my oath, sir, that you weren't
really what might be called tight, Mr. Tompkins."
"Thanks a million, Tammy," I said. "That's a load off my mind. I drew
a blank and didn't know where I'd been or what I'd been doing. Can
you let me have some money? I'm a bit short of cash."
"Of course, sir. How much will you need?"
"A couple of hundred will do," I told him, "if you have that much."
"That will be easy, sir. If you'll just sign a check, like the house rules
says, I'll get it from the safe."
He nearly caught me. Signing checks was something I simply could
not do until I had learned to imitate Winnie Tompkins' signature. I
had tried in the guest-room at Bedford Hills, the previous evening,
and found that my original signature as Frank E. Jacklin was
completely unchanged by my transmigration, and that my own copy-
desk scrawl was the only handwriting I could commit. I had burned
the note-paper on which I had made the crucial experiments and
flushed the ashes down the toilet. One of my objects in coming to
the Pond had been to see if I couldn't get money by simply initialing
a chit.