Cheyenne holds a $10,000 portfolio that consists of four stocks. Her investment

Question

Cheyenne 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: Stock Andalusian Limited (AL) Zaxatti Enterprises (ZE) Water and Power Co. (WPC) Mainway Toys Co. (MTC) Investment $3,500 $2,000 $1,500 $3,000 Beta 0.80 1.50 1.15 0.30 Standard Deviation 9.00% 11.50% 16.00% 22.50% Suppose all stocks in Cheyenne'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 Mainway Toys Co. O Zaxatti Enterprises O Andalusian Limited Water and Power Co. O Zaxatti Enterprises Andalusian Limited O Mainway Toys Co If the risk-free rate is 7% and the market risk premium is 990, what is Cheyenne's portfolio's beta and required return? Fill in the following table: Beta Required Return Cheyenne's portfolio

Explanation / Answer

1) Mainway Toys co. would contribute the least market risk to the portfolio as it's beta is lowest.

2) Andalusian Limited has the least amount of standalone risk as its standard deviation is lowest.

3) To compute the beta of portfolio, multiply the beta of each stock with its weight in the portfolio and add them all -

Beta (Portfolio) = (0.80 x 3500 / 10000) + (1.50 x 2000 / 10000) + (1.15 x 1500 / 10000) + (0.30 x 3000 / 10000)

Or, Beta (Portfolio) = 0.8425 or 0.84

Required Return = Rf + Beta x Market Risk Premium = 7% + 0.8425 x 9% = 14.5825% or 14.58%

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