Question

Elle halds 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 Beta Standard Deviation Andalusian Limited (AL) Tobatics Inc. (TI) Water and Power Co. (WPC) Makissi Corp. (MC) 3,500 $2,000 $1,500 $3,0OD 9.00% 1.30 19.50% Suppose all stacks 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 portfollo were equally weighted. Which of these stocks would have the least amount of standalone risk? O Water and Power Co. O Tobotics Inc. O Makissi Corp. O Andalusian Limited O Makissi Corp. O Andalusian Limited O Water and Power Co. O Tobotics Inc. If the risk-free rate is 7% and the market nsk premium is 9%, what is Elle's portfolio's beta and required return? Fil in the following table: Beta Required Return Elle's portfolio 0.561 0.561 0.838 0.712

Answer 1

Market risk is beta. So, stock having the least beta will contribute the least maket risk. Therefore, Makissi Corp ?will contribute the least market risk since it has the least beta.

Standalone risk is given by standard deviation. Therefore, Andalusian Limited ?will contribute the least standalone risk since it has the least standalone risk.

?Portfolio beta

Weight of AL = $3500 / $10000 = 0.35, Weight of TI = $2000 / $10000 = 0.20, Weight of WPC = $1500 / $10000 = 0.15, Weight of MC = $3000 / $10000 = 0.30

Portfolio beta = 0.90 x 0.35 + 1.30 x 0.20 + 1.15 x 0.15 + 0.30 x 0.30 = 0.8375 or 0.838

???Required return

Required return as per CAPM is computed as follows -

Required return = risk free rate + Beta x market risk premium = 7% + 0.838 x 9% = 14.542% or 14.54%