Question

Ariel holds a $5,000 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
Omni Consumer Products Co. (OCP)	$1,750	0.80	15.00%
Zaxatti Enterprises (ZE)	$1,000	1.30	11.50%
Water and Power Co. (WPC)	$750	1.15	16.00%
Flitcom Corp. (FC)	$1,500	0.50	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?

Flitcom Corp.

Zaxatti Enterprises

Omni Consumer Products Co.

Water and Power Co.

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

Zaxatti Enterprises

Flitcom Corp.

Water and Power Co.

Omni Consumer Products 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

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Answer 1

C24 X =B24/$B$29 fix B D Market value $ 23 Stock 24 OCP 25 ZE 26 WPC 27 FC 1,750 1,000 750 1,500 C Weights in portfolio 0.35 0.20 0.15 0.30 Beta 0.80 1.30 1.15 0.50 E Weighted beta 0.280 0.260 0.173 0.150 $ 28 29 Total 5,000 1.00 0.863 Beta of the portfolio, B 32 33 New Required return on portfolio =Rf+BxRp 34 Rf is risk free return 35 Rp is risk premium 36 37 Requried rate of return 14.767% =7%+0.863*9% 39 40 Least amount of market risk Flitcom Corp. (FC) 41 Least amount of stand-alone risk Zaxatti Enterprises (ZE)

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