Question

3. Portfolio risk and return

Ariel 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	Investment	Beta	Standard Deviation
Omni Consumer Products Co. (OCP)	$3,500	1.00	9.00%
Zaxatti Enterprises (ZE)	$2,000	1.50	12.00%
Water and Power Co. (WPC)	$1,500	1.20	20.00%
Makissi Corp. (MC)	$3,000	0.30	22.50%

Suppose all stocks in Ariel’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?

A. Makissi Corp.

B. Omni Consumer Products Co.

C. Water and Power Co.

D. Zaxatti Enterprises

Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?

A. Omni Consumer Products Co.

B. Zaxatti Enterprises

C. Water and Power Co.

D. Makissi Corp.

If the risk-free rate is 7% and the market risk premium is 8.5%, what is Ariel’s portfolio’s beta and required return? Fill in the following table:

	Beta	Required Return
Ariel’s portfolio	?	?

Answer 1