Question

8. Portfolio risk and return

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	Investment	Beta	Standard Deviation
Omni Consumer Products Co. (OCP)	$2,625	0.80	9.00%
Tobotics Inc. (TI)	$1,500	1.50	11.00%
Water and Power Co. (WPC)	$1,125	1.10	16.00%
Mainway Toys Co. (MTC)	$2,250	0.30	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?

1. Omni Consumer Products Co.

2. Mainway Toys Co.

3. Tobotics Inc.

4. Water and Power Co.

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

1. Mainway Toys Co.

2. Water and Power Co.

3. Tobotics Inc.

4. Omni Consumer Products Co.

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