Question

Assume you create your own portfolio made up of the four individual stocks shown below. The weighting of the porfoli0 is 30% stock W, 20% stock X, 20% Stock Y and 30% stock Z.

When you analyze the risk of the portfolio, which of the following parameters is true?

Time Period #	Market Return	Firm W	Firm X	Firm Y	Firm Z	T-Bill
1	0.333	0.191	0.218	0.955	0.601	0.035
2	-0.144	-0.423	-0.632	-0.747	-0.472	0.039
3	0.143	0.348	0.470	0.379	0.378	0.040
4	0.316	0.871	0.868	-0.192	0.502	0.036
5	0.178	0.912	0.499	0.694	0.364	0.036
6	-0.014	0.532	0.168	-0.671	-0.064	0.038
…	…	…	…	…	…	…
…	…	…	…	…	…	…
119	0.374	0.556	1.014	0.023	0.698	0.037
120	0.173	0.547	0.092	0.658	0.222	0.036
Average Return	0.082	0.113	0.067	0.167	0.121	0.029
Standard Deviation	0.156	0.369	0.497	0.398	0.456	0.011
Beta	1.00	1.21	0.89	1.41	1.25	0.00

• he riskiness of the portfolio will be greater than the overall riskiness of the Market.

• The riskiness of the portfolio will be less than the overall riskiness of the Market.

• The riskiness of the portfolio will be equal to the overall Market

• There is inadequate information to answer this question

Answer 1

Solution) Beta of portfolio = BetaW*Ww + BetaX*Wx + BetaY*Wy + BetaZ*Wz

Ww, Wx, Wy and Wz are the weights of the firm W, X, Y and Z

Ww = 30%

Wx = 20%

Wy = 20%

Wz = 30%

Beta of portfolio = 30%*1.21 + 20%*0.89 + 20%*1.41 + 30%*1.25

Beta of portfolio = 1.198

Since beta of portfolio is greater than 1, thus, the portfolio's riskiness is more than the overall riskiness of the market.

The correct option is A.

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