Question

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
Omni Consumer Products Co. (OCP)	$3,500	1.00	12.00%
Zaxatti Enterprises (ZE)	$2,000	1.30	11.00%
Water and Power Co. (WPC)	$1,500	1.10	20.00%
Flitcom Corp. (FC)	$3,000	0.40	19.50%

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

Zaxatti Enterprises

Water and Power Co.

Omni Consumer Products Co.

Flitcom Corp.

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

Water and Power Co.

Flitcom Corp.

Zaxatti Enterprises

Omni Consumer Products Co.

If the risk-free rate is 7% and the market risk premium is 9%, what is Elle’s portfolio’s beta and required return? Fill in the following table:

	Beta	Required Return
Elle’s portfolio

Answer 1

1. Option ,Flitcom Corp. [ Beta is the lowest]

2. Option, Zaxatti Enterprises [ Standard deviation is lowest]

3. Portfolio beta = 0.895

Expected return = 7% + 0.895* 9% = 15.06%

Workings:

	Investment	Weights	Beta	(a)*(b)
		(a)	(b)
Omni Consumer Products Co.	3500	0.35	1	0.35
Zaxatti Enterprises (ZE)	2000	0.2	1.3	0.26
Water and Power Co. (WPC)	1500	0.15	1.1	0.165
Flitcom Corp. (FC)	3000	0.3	0.4	0.12
Portfoli beta	10000			0.895