Question

Elle holds a $7,500 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 Standard Deviation 9.00% Investment Beta $2,625 0.80 $1,500 1.90 $1,125 1.15 $2,250 0.30 Andalusian Limited (AL) Zaxatti Enterprises (ZE) Western Gas & Electric Co. (WGC) Mainway Toys Co. (MTC) 11.50% 16.00% 28.50% Suppose all stocks in Elle's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? O Zaxatti Enterprises Mainway Toys Co. Andalusian Limited Western Gas & Electric Co. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk? Western Gas & Electric Co. O Andalusian Limited O Mainway Toys Co. O Zaxatti Enterprises If the risk-free rate is 4% and the market risk premium is 5.5%, what is Elle's portfolio's beta and required return? Fill in the following table: Beta Required Return Elle's portfolio

Answer 1

1). Beta represents the market risk. So, Stock with least beta will have least market risk, which is Mainway Toys Co. with a beta of 0.30

So, 2nd option is correct.

2). Standard deviation represents the stand-alone risk. So, Stock with least standard deviation will have least stand-alone risk, which is Andalusian Limited with a standard deviation of 9.00%

So, 2nd option is correct.

3). Portfolio's beta = [Weight_i * Beta_i]

i-1

= [(2,625/7,500) * 0.80] + [(1,500/7,500) * 1.90] + [(1,125/7,500) * 1.15] + [(2,250/7,500) * 0.30]

= 0.28 + 0.38 + 0.1725 + 0.09 = 0.9225

Required Return = Risk-free rate + [Beta * Market risk premium]

= 4% + [0.9225 * 5.5%] = 4% + 5.07375% = 9.07375%