Question

Cheyenne holds a $7,500 portfolio that consists of four stocks. Her investment in each stock, as well as each stock's beta, is listed in the following table:

Stock	Investment	Beta	Standard Deviation
Perpetualcold Refrigeration Co. (PRC)	$2,625	0.90	18.00%
Zaxatti Enterprises (ZE)	$1,500	1.30	11.00%
Western Gas & Electric Co. (WGC)	$1,125	1.10	18.00%
Mainway Toys Co. (MTC)	$2,250	0.60	19.50%

Suppose all stocks in Cheyenne's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?

Perpetualcold Refrigeration Co.

Mainway Toys Co.

Zaxatti Enterprises

Western Gas & Electric Co.

Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?

Zaxatti Enterprises

Mainway Toys Co.

Western Gas & Electric Co.

Perpetuaicoid Refrigeration Co.

If the risk-free rate is 7% and the market risk premium is 8.5%, what is Cheyenne's portfolio's beta and required return? Fill in the following table:  

	Beta	Required Return
Cheyenne's portfolio

Answer 1

If all stocks are equally weighted in Cheyenne portfolio; then stock with lowest beta would contribute least market risk to the portfolio.

Stock with lowest beta is Mainway Toys Co. (MTC)

Therefore correct answer is option: Mainway Toys Co.

If all stocks are equally weighted in Cheyenne portfolio; then stock with lowest standard deviation would contribute least stand-alone risk to the portfolio.

Stock with lowest standard deviation is Zaxatti Enterprises (ZE)

Therefore correct answer is option: Zaxatti Enterprises

Cheyenne portfolio’s beta = ∑ (stock’s weight in Portfolio * beta of stock)

= ($2,625/$7,500) * 0.90 + ($1,500/$7,500) * 1.30 + ($1,125/$7,500) * 1.10 + ($2,250/$7,500) * 0.60

= 0.92

Now the required return of Cheyenne’s portfolio = Risk free rate + Cheyenne portfolio’s beta * market risk premium

Where,

Risk free rate = 7%

Cheyenne portfolio’s beta =0.92

Market risk premium = 8.5%

Therefore,

The required return of Cheyenne’s portfolio = 7% + 0.92 * 8.5%

=7% + 7.82% = 14.82%