This is so hard especially the BETA portfolio I cannot calculate. Your investmen

Question

This is so hard especially the BETA portfolio I cannot calculate.

Your investment portfolio consists of the following stocks                                    Investment Portfolio Name Price Beta # shares Dow Chemical $      59.72 1.34 15,000 Walmart $      69.32 0.19 3,000 Boeing $   128.00 1.36 8,000 Verizon $      52.61 0.45 6,000 Consolidated Edison $      74.00 0.17 3,000 Caterpillar $      75.00 1.5 13,000 Deutsche bank $      22.55 1.4 9,000 a)      What is the portfolio beta? b)      What is the required return on the portfolio if the market return is 11 % and the risk free rate is 3% ? c)      If you are risk averse (do not like risk), how will you reconstruct your portfolio to reduce the risk or beta in the portfolio you calculated                         to get a beta between .5 and .6. Show how you will achieve this. d) If you like risk show how you will reconstruct your portfolio to increase your risk (Beta) level to between 1.4 and 1.5   e) What will happen to your investment if the market goes up 10 % and down 10% for the portfolio beta you calculated in ( c ) and (d)        How much will be your gain and loss in the portfolio you constructed?.

Explanation / Answer

a) Statement showing Portfolio beta

b) Required return = risk free return + beta(market return - risk free return)

=3% + 1.186(11%-3%)

=3% + 9.488%

=12.488%

c) To get beta beween 0.5 and 0.6, lets say we want to get beat of 0.55

Now present beta = 1.186

Required beta = 0.55

It should become = 0.55/1.186 = 46.37%

If 3843370 is 46.37% then total portfolio should be = 3843370/0.4637 = 8287703.309$

Thus additional zero risk investment to bring in = 8287703.309-3843370 = 4444333.309$

Statement showing beta

d)

To get beta beween 1.4 and 1.5, lets say we want to get beat of 1.45

Now present beta = 1.186

Required beta = 1.45

It should become = 1.45/1.186 = 122%

If 3843370 is 122% then total portfolio should be = 3843370/1.22 = 3143611.6$

Thus zero risk investment to disinvest =3843370-3143611.6 = 699758.4$

Statement showing beta

Name Price # shares Total Value Weightage Beta Portfolio Beta( Weightage*beta) Dow Chemical 59.72 15000 895800 0.2331 1.34 0.312 Walmart 69.32 3000 207960 0.0541 0.19 0.010 Boeing 128 8000 1024000 0.2664 1.36 0.362 Verizon 52.61 6000 315660 0.0821 0.45 0.037 Consolidated Edison 74 3000 222000 0.0578 0.17 0.010 Caterpillar 75 13000 975000 0.2537 1.5 0.381 Deutsche bank 22.55 9000 202950 0.0528 1.4 0.074 3843370 1.186

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