P 5.23 c Describe which of the 2 risk components is the relevant risk, and expla
ID: 2793691 • Letter: P
Question
P 5.23
c Describe which of the 2 risk components is the relevant risk, and explain why it is relevant. How much of this risk exists in David Finney's portfoho? PS.21 If portfolio A has a beta of +1.50 and portfolio Z has a beta of -1.50, what do the 2 values indicate? If the return on the market rises by 20%, what impact, if any, Ps.22 Stock A has a beta of 0.s0, stock B has a beta of 1.40, and stock C has a beta b. If the return on the market portfolio increases by 12%, what change in the would this have on the returns from portfolios A and z? Explain. of-0.30. a. Rank these stocks from the most risky to the least risky return for each of the stocks would you expect? C. If the return on the market portfolio declines by 5%, what change in t return for each of the stocks would you expect? d. If you felt the stock market was about to experience a significant decline, which stock would you be most likely to add to your portfolio? Why? e. If you anticipated a major stock market rally, which stock would you be most likely to add to your portfolio? Why? P5.23 Rose Berry is attempting to evaluate 2 possible portfolios consisting of the same 5 assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data: Portfolio Weights (96) Portfolio A Portfolio B Asset Asset Beta 1.30 0.70 1.25 1.10 0.90 10 30 10 10 40 100 30 10 20 20 20 100 2 Total a. Calculate the betas for portfolios A and B. b. Compare the risk of each portfolio to the market as well as to each other. Which portfolio is more risky? P5.24 Referring to Problem 5.23 above, if the risk-free rate is 2% and the market return is 12%, calculate the required return for each portfolio using the C APM. P5.25 Referring to Problem 5.24 above, assume you now have the following annual returns (r) for each investment. Asset (j) 16.5% 12.0% 15.0% 13.0% 7.0%Explanation / Answer
Problem 5 - 23
Beta of portfolio A = (10% × 1.30) + (30% × 0.70) + (10% × 1.25) + (10% × 1.10) + (40% × 0.90)
= 0.13 + 0.21 + 0.125 + 0.11 + 0.36
= 0.935
Beta of portfolio A is 0.935.
Beta of portfolio B = (30% × 1.30) + (10% × 0.70) + (20% × 1.25) + (20% × 1.10) + (40% × 0.20)
= 0.39 + 0.07 + 0.25 + 0.22 + 0.18
= 1.11
Beta of portfolio B is 1.11.
b.
Beta represent market risk of an assets. Beta of market is 1. if assest whose beta is less than 1, then risk of that assets is less than market risk and if beta of assets is more than one then risk of that assets is more than market.
here beta of portfolio A is 0.935 and beta of portfolio B is 1.11. So portfolio A is less risk than market and portfolio B has more risk than portfolio B. Posrtfolio A is less risky than portfolio B.
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