Question

4. Portfolio risk and return

Elle holds a $10,000 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	Investment	Beta	Standard Deviation
Omni Consumer Products Co. (OCP)	$3,500	0.80	15.00%
Tobotics Inc. (TI)	$2,000	1.90	12.00%
Three Waters Co. (TWC)	$1,500	1.20	16.00%
Makissi Corp. (MC)	$3,000	0.50	28.50%

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

Total Investment = 3,500 + 2,000 + 1,500 + 3,000 = 10,000

Beta of Portfolio = Beta of OCP * Weight of OCP + Beta of TI * Weight of TI + Beta of TWC* Weight of TWC + Beta of MC* Weight of MC

= 0.80 * 3500/10000 + 1.90 * 2000/10000 + 1.2 * 1500/10000 + 0.50 * 3000/10000

= 0.99

Return of Portfolio =

R: + beta(Rm - R)

= 7% + 0.99(9%)

= 15.91%

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