Question

8. Portfolio risk and return Elle 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: Standard Deviation 9.00% Stock Omni Consumer Products Co. (OCP) Zaxatti Enterprises (ZE) Three Waters Co. (TWC) Mainway Toys Co. (MTC) Investment $1,750 $1,000 $750 $1,500 Beta 0.80 1.90 1.15 0.30 11.50% 16.00% 28.50% Suppose all stocks in Elle's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? Three Waters Co. Omni Consumer Products Co. Zaxatti Enterprises Mainway Toys Co. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk? Omni Consumer Products Co. O Mainway Toys Co. Three Waters Co. Zaxatti Enterprises If the risk-free rate is 4% and the market risk premium is 5.5%, what is Elle's portfolio's beta and required return? Fill in the following table: Beta Required Return Elle's portfolio

Answer 1

1). Least market risk will be contributed by the stock having lowest beta which is Mainway Toys.

2). On a stand-alone basis, Omni Consumer Products will contribute the least stand-alone risk as it has the lowest standard deviation.

3). Portfotlio beta = sum of weighted betas

= (1,750/5,000)*0.80 + (1,000/5,000)*1.90 + (750/5,000)*1.15 + (1,500/5,000)*0.30 = 0.9225

Portfolio return (using CAPM) = risk-free rate + beta*market risk premium = 4% + (0.9225*5.5%) = 9.07%