Ariel holds a $10,000 portfolio that consists of four stocks. Her investment in

Question

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 Investment $3,500 $2,000 $1,500 $3,000 Beta 0.80 1.30 1.10 0.50 Standard Deviation 15.00% 11 .00% 16.00% 19.50% Stock Omni Consumer Products Co. (OCP) Kulatsu Motors Co. (KMC) Three Waters Co. (TWC) Makissi Corp. (MC) Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? Suppose all stocks in the portfolio were equally weighted Which of these stocks would have the least amount of standalone risk? Three Waters Co Kulatsu Motors Co Makissi Corp Omni Consumer Products Co O Kulatsu Motors Co Three Waters Co Omni Consumer Products Co O Makissi Corp If the risk-free rate is 4% and the market risk premium is 6%, what is Ariel's portfolio's beta and required return? Fill in the following table Beta Required Return Ariel's portfolio

Explanation / Answer

1st question:

D. Makissi corp>

The stock with lowest beta will contribute to the least market risk to the portfolio.

2nd question:

B.Kulatsu motors corp.

The stock with least standard deviation will have least amount of stand alonerisk.

3rd question :

working:

portfolio beta:

required return = riskfree rate + beta *(market risk premium)

=>4% + 0.855*(6%)

=>9.13%.

stock weight beta weight * beta omni consumer products co (3500/10000)=>0.35 0.80 0.28 kulatsu motors co (2000/10000)=>0.20 1.30 0.26 three waters co (1500/10000)=>0.15 1.10 0.165 makissi corp (3000/10000)=>0.30 0.50 0.15 portfolio beta 0.855

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