Question

Ch 08: Assignment - Risk and Rates of Return Attempts: Average: 73 8. Portfolio risk and return Ariel holds a $7,500 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 Investment $2,625 0.90 12.00% $1,500 Andalusian Limited (AL) Zaxatti Enterprises (ZE) Western Gas & Electric Co. (WGC) Mainway Toys Co. (MTC) 1.90 1.20 12.00% 18.00% $1,125 $2,250 0.40 28.50% Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? O Andalusian Limited O Mainway Toys Co. O Zaxatti Enterprises O Western Gas & Electric Co. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk? O Mainway Toys Co. O Andalusian Limited O Western Gas & Electric Co. O Zaxatti Enterprises If the risk-free rate is 7% and the market risk premium is 8.5%, what is Ariel's portfolio's beta and required return? Fill in the following table: Beta Required Return Ariel's portfolio

Answer 1

Beta represents the market risk. Hence, Mainway Toys co. would contribute the least market risk to the portfolio as its beta is least.

Standard deviation represents the stand alone risk. Hence, both AL and ZE . would contribute the least market risk to the portfolio as their Standard deviation is least.

The beta of a portfolio is the weighted average beta of the securities which constitute the porfolio

Stock	Weight	Beta	Weight*Beta
AL	0.35	0.90	0.315
ZE	0.20	1.90	0.380
WGC	0.15	1.20	0.180
MTC	0.30	0.40	0.120

Weight = Investment/value of portfolio

Portfolio Beta = Weight*Beta

= .315+.380+.180+.120

= 0.995

Using Capital Asset Pricing Model

Required Rate of Return = Rf + b ( Rm – Rf )

Where,

Rf – Risk free return = 7%

b – Beta = .995

Rm – Expected return on market portfolio

Rm-Rf – Market risk premium = 8.5%

Required Rate of Return = 7+.995*8.5

= 7+8.4575

= 15.4575%

= 15.46%