Question

Assignment 08 - Risk and Rates of Return 5. Portfolio risk and return Aa Aa Aa Ariel 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 Omni Consumer Products Co. (OCP) Zaxatti Enterprises (ZE) Water and Power Co. (WPC) Flitcom Corp. (FC) Investment $2,625 $1,500 $1,125 $2,250 Beta 0.90 1.30 1.15 0.40 Standard Deviation 12.00% 11.50% 18.00% 19.50% Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of standalone risk? Zaxatti Enterprises O Omni Consumer Products Co. Water and Power Co. Flitcom Corp. O Water and Power Co. Omni Consumer Products Co. Zaxatti Enterprises Flitcom Corp. If the risk-free rate is 7% and the market risk premium is 9%, what is Ariel's portfolio's beta and required return? Fill in the following table: Beta Required Return Ariel's portfolio C D

Answer 1

Least Market risk is with lowest beta stock

Flitcom Corp.

Least standalone risk is with lowest standard deviation stock

Zaxatti Enterprises

Portfolio Beta = [2,625(0.90) + 1,500(1.30) + 1,125(1.15) + 2,250(0.40)]/7,500

Portfolio Beta = 0.87

Required Return = 0.07 + 0.87(0.09)

Required Return = 14.83%