Question

8. Portfolio risk and return

Elle 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
Perpetualcold Refrigeration Co. (PRC)	$3,500	0.90	15.00%
Kulatsu Motors Co. (KMC)	$2,000	1.50	12.00%
Water and Power Co. (WPC)	$1,500	1.20	18.00%
Makissi Corp. (MC)	$3,000	0.50	22.50%

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

Water and Power Co.

Perpetualcold Refrigeration Co.

Makissi Corp.

Kulatsu Motors Co.

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

Perpetualcold Refrigeration Co.

Water and Power Co.

Kulatsu Motors Co.

Makissi Corp.

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

	Beta	Required Return
Elle’s portfolio

Answer 1