Question

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

Investment

Beta

Standard Deviation

Perpetualcold Refrigeration Co. (PRC)

$2,625

0.80

9.00%

Kulatsu Motors Co. (KMC)

$1,500

1.70

11.50%

Three Waters Co. (TWC)

$1,125

1.15

16.00%

Flitcom Corp. (FC)

$2,250

0.30

25.50%

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

Kulatsu Motors Co.

Flitcom Corp.

Three Waters Co.

Perpetualcold Refrigeration Co.

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

Three Waters Co.

Flitcom Corp.

Kulatsu Motors Co.

Perpetualcold Refrigeration Co.

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

Options for Beta – 0.751 , 0.592, 1.325, 0.883

Options for Required Return – 14.947%, 8.766%, 21.128%, 17.189%

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center Paste в IU* $ % , 000 Conditional Format Cell Insert Delete Format Sort & Find & Filter Select Format Painter Clear Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox AG656 7 АА АВ АC AD АЕ AF AG АН MARKET RISK IS MEASURED BY "BETA". LOWER THE BETA, LOWER THE MARKET RISK. BETA IS LOWEST FOR "FLITCOM CORP". 644 ANS 1 645 646 ANS 2 STAND ALONE RISK IS MEASURED BY STANDARD DEVIATION. LOWER THE STANDARD DEVIATION, LOWER THE STAND ALONE RISK. IT IS LEAST FOR "PERPETUALCOLD REFRIGERATION CO" 647 648 STOCK 649 ANS 3 ALLOCATION WEIGHTS ВЕТА WEIGHTED BETA W*B 650 W В 0.3500 651 PRC 2625 0.8 0.280 652 1500 0.2000 1.7 0.340 653 TWC 1125 0.1500 1.2 0.173 0.090 654 FLITCOM 2250 0.3000 0.3 655 7500 1.0000 PORTFOLIO BETA 0.8825 656 CHEYENNE'S PORTFOLIO BETA = 657 0.883 658 Rf beta(Rm-Rf) 659 ANS 4 BOB'S REQUIRED RETURN [Rf 4%, Rm-Rf = RISK PREMIUM =5.5%] BOB'S REQUIRED RETURN 7%+0.883(9%) 660 BOB'S REQUIRED RETURN 14.9470% 661 [NO INTERMEDIATE ROUNDING IS DONE] 662 14.947% RESI e LEASING PV, FV, ANNUITY DGM beta DIR right clean KE CAPM UTILITY, SHARPE, beta port future INDEX INTL CAP BUD YIELD bond portfolio cONvexity cap stru WACC L 130 % erences: AG470 WA 01:46 1ENG 20-11-2019