Question

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: Stock Investment Beta Standard Deviation $1,750 1.00 15.00% Andalusian Limited (AL) Zaxatti Enterprises (ZE) $1,000 1.70 12.00% Three Waters Co. (TWC) $750 1.20 20.00% Makissi Corp. (MC) $1,500 0.50 25.50% Suppose all stocks in Elle's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? O Zaxatti Enterprises O Three Waters Co. Andalusian Limited O Makissi Corp. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk? O Makissi Corp. O Andalusian Limited O Zaxatti Enterprises O Three Waters Co.

Answer 1

First question:

Since the portfolio is equally weighted, the stock which has the lowest beta contribute the least market risk to the portfolio. In the given case, Makissi Corp. has the lowest beta.

Hence the answer is the last option: Makissi Corp.

Second question:

Since the portfolio is equally weighted, the stock which has the lowest standard deviation contribute the least standalone risk to the portfolio. In the given case, Zaxatti Enterprises has the lowest beta.

Hence the answer is the third option: Zaxatti Enterprises

Third question:

Portfolio beta is the weighted average beta of all stocks included.

Portfolio beta= 1.02 as below:

F7 f =SUM(F3:56) B С Investment Weight (W) E F W*Beta Beta A 1 Stock 2 3 Andalusian Ltd 4 Zaxatti Enterprises 5 Three Waters Co. 6 Makissi Corp. 7 Total 1,750 B3/B7= 1,000 B4/B7= 750 B5/B7= 1,500 B6/B7= 5,000 0.35 0.2 0.15 0.3 1 1.7 1.2 0.5 0.35 0.34 0.18 0.15 1.02

As per CAPM, required return on portfolio=   Rf+MRP*Beta

Where Rf= Risk free rate (given as 7%) and MRP= Market Risk Premium (given as 8.5%)

Plugging the values,

Required return on portfolio=   7%+8.5%*1.02 = 7%+8.67% = 15.67%