Question

Keep the Highest: 14 5. Portfolio risk and return Aa Aa 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: TIT Stock Investment Beta Standard Deviation Perpetualcold Refrigeration Co. (PRC) $1,750 0.80 15.00% Zaxatti Enterprises (ZE) $1,000 1.70 11.50% Three Waters Co. (TWC) 1.15 16.00% $750 Mainway Toys Co. (MTC) 0.50 25.50% $1,500 Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of least market risk to the portfolio? standalone risk? Zaxatti Enterprises O Perpetualcold Refrigeration Co. O Three Waters Co. Zaxatti Enterprises Perpetualcold Refrigeration Co. Mainway Toys Co. Mainway Toys Co. Three Waters 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: Betat Required Return Ariel's portfolio 0.943 0.632 1.415 0.802

Answer 1

Least Market risk to the portfolio is Mainway Toys Co. (MTC) Reason is that it has the lowest beta. Beta is the market measure of the risk. Market portfolio has beta of 1 and beta less than 1 shows that stock is less risky than maket. b) Stock with the least amount of Standalone risk is Zaxatti Enterprises (ZE) Reason is that it has the lowest standard deviation. Standard deviation helps measure security volatilty and lower the volatility (Standard deviation), the lower the risk. Ariel Beta = (Betaprc * Weight) + (Betaze * Weight) + (Betatwc * Weight) + (Betamtcm Weight) = (0.80 x 1750/5000) + (1.70 * 1000/5000) + (1.15 x 750/5000) + (0.50 × 1500/5000) = (0.28) + (0.34) + (0.1725) + (0.15) = 0.943 Risk-free rate=7% Market premium=(rm-rf) =9% Therefore, E(R) =risk-free rate + beta (Market Premium) = 7%+0.943(6%) =15.49%