Question

7. Portfolio risk and return Ariel holds a $7,500 portfolio that consists of four stocks. Her...

7. Portfolio risk and return

Ariel 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

Perpetualcold Refrigeration Co. (PRC) $2,625 0.90 18.00%
Zaxatti Enterprises (ZE) $1,500 1.70 11.00%
Western Gas & Electric Co. (WGC) $1,125 1.10 18.00%
Flitcom Corp. (FC) $2,250 0.60 25.50%

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

Western Gas & Electric Co.

Flitcom Corp.

Perpetualcold Refrigeration Co.

Zaxatti Enterprises

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

Western Gas & Electric Co.

Flitcom Corp.

Perpetualcold Refrigeration Co.

Zaxatti Enterprises

If the risk-free rate is 4% and the market risk premium is 5.5%, what is Ariel’s portfolio’s beta and required return? Fill in the following table:

Beta

Required Return

Ariel’s portfolio      

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