Question

5. Portfolio risk and return Aa Aa Ariel 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: Beta Standard Deviation 9.00% 0.90 Stock Omni Consumer Products Co. (OCP) Kulatsu Motors Co. (KMC) Three Waters Co. (TWC) Flitcom Corp. (FC) Investment $3,500 $2,000 $1,500 $3,000 1.30 11.00% 1.10 18.00% 0.30 19.50% Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? Omni Consumer Products Co. Kulatsu Motors Co. Three Waters Co. Flitcom Corp. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of standalone risk? Flitcom Corp. Three Waters Co. Kulatsu Motors Co. Omni Consumer Products Co. If the risk-free rate is 4% and the market risk premium is 6%, what is Ariel's portfolio's beta and required return? Fill in the following table: Beta Required Return Ariel's portfolio

Answer 1

C24 ху fx =B24/$B$29 А B D Stock 23 24 OCP 25 KMC 26 TWC 27 FC $ $ $ $ Market value 3,500 2,000 1,500 3,000 с Weights in portfolio 0.35 0.20 0.15 0.30 Beta 0.90 1.30 1.10 0.30 E Weighted beta 0.32 0.26 0.17 0.09 28 29 Total S 10,000 1.00 30 31 Beta of the portfolio, ß 0.83 32 33 New Required return on portfolio = Rf+BxRp 34 Rf is risk free return 35 Rp is risk premium 36 37 Required rate of return 8.98% 38 =4%+0.83*6% 39 40 Least amount of market risk Flitcom Corp. (FC) 41 Least amount of stand-alone risk Omni Consumer Products Co. (OCP)

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