Question

5. Portfolio risk and return 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: Stock Perpetualcold Refrigeration Co. (PRC) Zaxatti Enterprises (ZE) Three Waters Co. (TWC) Mainway Toys Co. (MTC) Investment $1,750 $1,000 $750 $1,500 Beta 0.80 1.70 1.15 Standard Deviation 15.00% 11.50% 16.00% 25.50% 0.50 Suppose all stocks in Ariel'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 Perpetualcold Refrigeration Co. Three Waters Co. O Mainway Toys Co. Zaxatti Enterprises O Perpetualcold Refrigeration Co. O 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: Beta Required Return Ariel's portfolio OC 0.943 0.632 1.415 0.802

Answer 1

(1)...........Option - (A) Zaxatti Enterprise.

Beta is the measure of market risk. From the information provided, we see that, Zaxatti Enterprise is having highest Beta, hence it is likely to contribute more with equal weights being applied.

(2) ...........Option - (D) Main way Toys.

Standard deviation is the measure of standalone risk ( i.e unique risk). We can see that Main way toys is having highest standard deviation

(3)..............Option - (D) .... 8.89%

Computing the portfolio Beta

	Investment	W	Beta	W * Beta
PRC	1750	0.35	0.8	0.28
ZE	1000	0.2	1.7	0.34
TWC	750	0.15	1.15	0.1725
MTC	1500	0.3	0.5	0.15
Total	5000	Portfolio beta		0.9425

Expected return = Rf + Beta * ( Rm - Rf)

= 7 + 0.9425 * ( 9 - 7 )

= 8.89 %