5. Portfolio risk and return Aa Aa Elle holds a $5,000 portfolio that consists o

Question

5. Portfolio risk and return Aa Aa 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: Beta 0.80 1.50 1.10 0.30 Standard Deviation 9.00% 11 .00% 16.00% 22.50% Stock Omni Consumer Products Co. (OCP) Zaxatti Enterprises (ZE) Western Gas & Electric Co. (WGC) Flitcom Corp. (FC) Investment $1,750 $1,000 $750 $1,500 Suppose all stocks 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 portfolio were equally weighted Which of these stocks would have the least amount of standalone risk? Q Western Gas & Electric Co O Flitcom Corp O Zaxatti Enterprises Omni Consumer Products Co O Zaxatti Enterprises Western Gas &Electric; Co O Flitcom Corp Omni Consumer Products Co If the risk-free rate is 4% and the market risk premium is 6%, what is Elle's portfolio's beta and required return? Fill in the following table: Beta Required Return Elle's portfolio

Explanation / Answer

a. Beta of Fitman Corp is 0.30 which is lowest as compare with Beta other Company. Hence investment in Fitman Corp. would contribute the least market risk to the Portfolio b. Standard Deviation of Omni Consumer product is 9% which is lowest as compare to other Company. Hence, investment in Omni Consumer would have the least Standalone risk. C(1). Beta= Beta OCP*WA +Beta ZE*WA+Beta WGC*WA +Beta FC*WA = (0.80*$1750/$5000)+(1.50*$1000/$5000) + (1.10*$750/$5000)+(0.30*$1500/$5000) 0.835 C(2). Required Return ( KE)= Rf +Beta* Market Risk Premium Ke=4%+0.835*6% Ke=9.01%

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