What is the portfolio beta? What is the required return on the portfolio if the

Question

What is the portfolio beta?
What is the required return on the portfolio if the market return is 11 % and the risk free rate is 3%?
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. If you like risk show how you will reconstruct your portfolio to increase your risk (Beta) level to between 1.4 and 1.5 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?
What is the portfolio beta?
What is the required return on the portfolio if the market return is 11 % and the risk free rate is 3%?
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. If you like risk show how you will reconstruct your portfolio to increase your risk (Beta) level to between 1.4 and 1.5 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?
Investment Portfolio Name Price Beta # shares Dow Chemical Walmart Boeing Verizon Consolidated Edison 74.00 0.17 3,000 Caterpillar Deutsche bank S 59.72 1.34 15,000 S 69.32 0.19 3,000 S 128.00 1.36 8,000 S 52.61 0.45 6,000 S 75.00 5 13,000 S 22.55 14 9,000

Explanation / Answer

a) Calculating Portfolio Beta

Since Portfolio beta is the weighted average beta, thus

Portfolio Beta would be= 1.186

b) Requirred Return on Portfolio = Rf +Beta(Rm-Rf) = 3% +1.186(11%-3%) = 3%+9.488% = 12.488%

c) For Being the risk averse(do not like the risk), to make the beta .55(avg. of .5 & .6, reconstruting portfolio

by investing in low beta stock & let amt. to be invested be x

.55 =(1.186*3843370)/(3843370+x) +(.17*x)/(3843370+x)

.55= (4558236.82+.17*x)/(3843370+x)

2113853.5+.55x=4558236.82+.17x

.38x=2444383,

x=6438588

Thus, amt. to be invested in consolidated edison to make portfolio beta.55 is 6,438,588

d)Amt. to be invested to make the portfolio beta 1.45(avg. of 1.4& 1.5) & let amt. be y

For this we have to invest in high beta stock,

1.45 =(1.186*3843370)/(3843370+y) +(1.5*y)/(3843370+y)

1.45= (4558236.82+1.5*y)/(3843370+y)

5572886.5+1.45y=4558236.82+1.5y

1014649.68=.05y

y=20,292,994

Thus amt. to be invested in caterpillar be 20,292,994 to make beta 1.45

Name Shares Price Investment Beta(B) (A*B)/Total Investment Dow Chemical 15000 59.72 895800 1.34 0.312 Walmart 3000 69.32 207960 0.19 0.010 Boeing 8000 128 1024000 1.36 0.362 Verizon 6000 52.61 315660 0.45 0.037 Consolidated Edison 3000 74 222000 0.17 0.010 Caterpillar 13000 75 975000 1.5 0.381 Duetsche Bank 9000 22.55 202950 1.4 0.074 Total 3843370 1.186

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