Question

**Conceptual questions on portfolio and stand-alone
risk**

Latasha 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 | 9.00% |

Kulatsu Motors Co. (KMC) | $1,500 | 1.70 | 11.00% |

Three Waters Co. (TWC) | $1,125 | 1.10 | 18.00% |

Mainway Toys Co. (MTC) | $2,250 | 0.30 | 25.50% |

Suppose all stocks in Latasha’s portfolio were equally weighted. The stock that would contribute the least market risk to the portfolio is . Further, if all of the stocks in the portfolio were equally weighted, the stock that would have the least amount of standalone risk is .

If the risk-free rate is 4.00% and the market risk premium is 6.50%, then Latasha’s portfolio will exhibit a beta of and a required return of .

Answer #1

The stock that would contribute least market risk to the portfolio is the stock with lowest standard deviation i.e. Perpetual Cold Refrigeration Co. (PRC)

The stock with the lease amount of standalone risk is the stock with the lowest beta i.e. Mainway Toys Co.(MTC)

Portfolio beta is equal to the weighted average beta

= 0.9*2,625/7,500 +1.7*1,500/7,500 + 1.1*1,125/7,500 + 0.3*2,250/7,500

= 0.315+0.34+0.165+0.09

= 0.91

Required return = risk free rate + beta*market risk premium

= 4% + 0.91*6.5%

= 9.915%

Hence, portfolio would exhibit a beta of 0.91 and required return of 9.915%

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...

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...

Cheyenne 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
Andalusian Limited (AL)
$2,625
0.90
18.00%
Kulatsu Motors Co. (KMC)
$1,500
1.30
12.00%
Western Gas & Electric Co. (WGC)
$1,125
1.20
18.00%
Mainway Toys Co. (MTC)
$2,250
0.60
19.50%
Suppose all stocks in Cheyenne’s portfolio were equally
weighted. Which of these stocks would contribute the least market
risk...

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 0.90
15.00%
Kulatsu Motors Co. (KMC) $2,000 1.70 11.00%
Water and Power Co. (WPC) $1,500 1.10
18.00%
Mainway Toys Co. (MTC) $3,000 0.50
25.50%
Suppose all stocks in Elle’s portfolio were equally weighted.
Which...

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
9.00%
Tobotics Inc. (TI)
$2,000
1.50
11.50%
Three Waters Co. (TWC)
$1,500
1.15
20.00%
Mainway Toys Co. (MTC)
$3,000
0.30
22.50%
Suppose all stocks in Elle’s portfolio were equally weighted.
Which of these stocks would contribute the least market risk...

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...

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...

. Portfolio risk and return
Emma holds a $5,000 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
Andalusian Limited (AL)
$1,750
0.90
12.00%
Tobotics Inc. (TI)
$1,000
1.30
12.00%
Water and Power Co. (WPC)
$750
1.20
18.00%
Makissi Corp. (MC)
$1,500
0.40
19.50%
Suppose all stocks in Emma’s portfolio were equally weighted.
Which of these stocks would contribute the least...

3. Portfolio risk and return
Ariel 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
9.00%
Zaxatti Enterprises (ZE)
$2,000
1.50
12.00%
Water and Power Co. (WPC)
$1,500
1.20
20.00%
Makissi Corp. (MC)
$3,000
0.30
22.50%
Suppose all stocks in Ariel’s portfolio were equally weighted.
Which of these stocks would contribute...

Cheyenne holds a $5,000 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)
$1,750
1.00
9.00%
Tobotics Inc. (TI)
$1,000
1.30
11.00%
Western Gas & Electric Co. (WGC)
$750
1.10
20.00%
Makissi Corp. (MC)
$1,500
0.30
19.50%
Suppose all stocks in Cheyenne’s portfolio were equally
weighted. Which of these stocks would contribute the least market
risk...

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