Question

9. Portfolio risk and return

Elle 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
Omni Consumer Products Co. (OCP)	$2,625	1.00	15.00%
Zaxatti Enterprises (ZE)	$1,500	1.50	11.00%
Three Waters Co. (TWC)	$1,125	1.10	20.00%
Flitcom Corp. (FC)	$2,250	0.50	22.50%

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

Omni Consumer Products Co.

Zaxatti Enterprises

Three Waters Co.

Flitcom Corp.

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

Omni Consumer Products Co.

Flitcom Corp.

Zaxatti Enterprises

Three Waters Co.

If the risk-free rate is 7% and the market risk premium is 9%, what is Elle’s portfolio’s beta and required return? Fill in the following table:

	Beta	Required Return
Elle’s portfolio	?	?

Answer 1

024 : X r fix =B24/$B$29 A D 23 Stock Market value Beta 24 OCP 25 ZE 26 TWC 27 FC 2,625 1,500 1.125 2,250 C Weights in portfolio 0.35 0.20 0.15 0.30 1.00 1.50 1.10 0.50 E Weighted beta 0.350 0.300 0.165 0.150 $ $ 28 S 7,500 1.00 29 Total 30 31 Beta of the portfolio, B 0.965 32 33 New Required return on portfolio = Rf+BXRp | 34 Rf is risk free return 35 Rp is risk premium 37 Requried rate of return 15.69% =7%+0.965*9% 40 Least amount of market risk Flitcom Corp. 41 Least amount of stand-alone risk Zaxatti Enterprises (ZE)

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