Question

Assignment 08 - Risk and Rates of Return 5. Portfolio risk and return Aa Aa 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 Omni Consumer Products Co. (OCP) Zaxatti Enterprises (ZE) Water and Power Co. (WPC) Makissi Corp. (MC) Investment $2,625 $1,500 $1,125 $2,250 Beta 0.90 1.30 Standard Deviation 9.00% 11.00% 18.00% 1.10 0.30 19.50% Suppose all stocks in Elle'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 Makissi Corp. O Water and Power Co. Omni Consumer Products Co. O Omni Consumer Products Co. Makissi Corp. O Water and Power Co. O Zaxatti Enterprises 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

1). Beta represents the market risk, so, the stock with least beta will have least market risk, which is Omni Consumer Products Co. has the least beta.

So, 4th option is correct.

2). Standard Deviation represents the standalone risk, so, the stock with least standard deviation will have least standalone risk, which is Omni Consumer Products Co. is the least standard deviation.

So, 1st option is correct.

3-a). Portfolio's Beta = $\sum_{i=1}^{n}$ [Weight_i * Beta_i]

= [(2625/7500) * 0.90] + [(1500/7500) * 1.30] + [(1125/7500) * 1.10] + [(2250/7500) * 0.30]

= 0.315 + 0.26 + 0.165 + 0.09 = 0.83

3-b). According to the CAPM,

Required Return = Risk-free Rate + [Beta * Market Risk Premium]

= 7% + [0.83 * 9%] = 7% + 7.47% = 14.47%