Question

8. Portfolio risk and return

Cheyenne holds a $10,000 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
Andalusian Uimited (AL)	$3,500	0.80	12.00%
Kulatsu Motors Co. (KMC)	$2,000	1.30	12.00%
Western Gas 8. Electric Co. (WGC)	$1,500	1.20	16.00%
Makissi Corp. (MC)	$3,000	0.40	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?

• Western Gas B Electric Co.

• Andalusian Limited

• Kulatsu Motors Co.

• Makissi Corp.

  
  

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

• Western Gas & Electric Co.

• Makissi Corp.

• Kulatsu Moters Co.

• Andalusian Limited

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

1.
Makissi Corp.
Least market risk is from lowest beta

2.
Kulatsu Motors Co.
Least stand-alone risk is from lowest standard deviation and highest beta

3.
Beta=(3500*0.80+2000*1.30+1500*1.20+3000*0.40)/10000=0.84

Required return=7%+0.84*8.5%=14.1400%