5. Portfolio risk and return Aa Aa Emma holds a $10,000 portfolio that consists

Question

5. Portfolio risk and return Aa Aa Emma 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: Investment $3,500 $2,000 $1,500 $3,000 Standard Deviation 12.00% 11.00% 18.00% 22.50% Stock Perpetualcold Refrigeration Co. (PRC) Kulatsu Motors Co. (KMC) Water and Power Co. (WPC) Mainway Toys Co. (MTC) Beta 0.90 1.50 1.10 0.40 Suppose all stocks in Emma'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? Water and Power Co O Kulatsu Motors Co O Perpetualcold Refrigeration Co O Mainway Toys Co O Perpetualcold Refrigeration Co Water and Power Co O Mainway Toys Co O Kulatsu Motors Co If the risk-free rate is 7% and the market risk premium is 996, what is Emma's portfolio's beta and required return? Fill in the following table: Beta Required Return Emma's portfolio 1.350 0.900 0.765 0.603 lash Player WIN 27,0,0,183 Q3 3.3.1 © 2004-2016 Apla. All nghts reserved. 2013 Cengage Leaming except as noted. All rights reserved. Grade It Now Save & Continue

Explanation / Answer

Least market risk = the stock with the lowest Beta

= Mainway toys

Least standalone risk = the stock with the lowest standard deviation

= Kulatsu motors

Portfolio Beta = Sum of investment*beta/total value of portfolio

= 3500*.9+ 2000*1.5 + 1500*1.1+ 3000*.4/ 10000

= 3150 + 3000 + 1650 + 1200/10000

= 9000/ 10000

= .9

Required return = Risk free rate + Beta*market premium

= 7% + .9*9%

= .07 + .9*.09

= .151 or 15.1%

Required return = 15.1% (we use the capital asset pricing model)

  

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