Question

2. (a) Explain the following statement: “An asset held as part of a portfolio is generally less risky than the same asset held in isolation.”

(b). An investor has a Three-stock portfolio with US$ 25,000 invested in CEMENCO, US$ 50,000 invested in Orange, and US$ 25,000 invested in Premier milling. CEMENCO’s BETA is estimated to be 1.20, Orange’s BETA is estimated to be 0.80, and Premier Milling’s Beta is estimated to be 1.0. What is the estimated Beta of the investor’s portfolio?

(c). What is the Beta of a stock that is as risky as the market?

(d). Explain the following statement: “Most Investors are risk averse”.

Answer 1

A) An asset is more risky than the portfolio of different assets. A single asset has a same type of risk. That risk is due to interest of customer in that asset in market, company risk on the asset ( due to change in market value of business), industrial risk on the asset.

In a portfolio assets are from difficult industries and companies so the risk has been diversified in a portfolio. It reduced total risk on the asset.

c) Beta value of market is 1. Beta coefficient is the non- diversified risk of asset related to the market. If the risk of an asset greater than market then the value is greater than 1. It shows asset having higher risk .

D) Investors don’t want to take risk for the uncertainty. Investors are more interested in certain returns and avoid uncertain returns. Investors prefer current earnings and avoid risk.