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Question

af/servlet/quiz?quiz action-takeQuiz&quiz; probGuid-ONAPCOA80101 0004194edb0070008ictx-Fan,/He-0027äuck Attempts: Average: /4 4. Portfolio risk and return Aa Aa E Emma 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 Standard Deviation 12.00% 11 .00% 18.00% 19.50% Investment Beta 0.90 Kulatsu Motors Co. (KMC)$2,000l1.30 Andalusian Limited (AL) $3,500 1.10 Three Waters Co. (TWC)$1,500 Mainway Toys Co. (MTC) $3,000 0.40 Suppose all stocks in Emma's portfolio were equallySuppose all stocks in the portfolio were equally weighted. weighted. Which of these stocks would contribute the Which of these stocks would have the least amount of least market risk to the portfolio? standalone risk? O Andalusian Limited O Kulatsu Motors Co. O Mainway Toys co. O Kulatsu Motors Co. O Andalusian Limited O Three Waters Co. O Mainway Toys Co. O Three Waters Co. If the risk-free rate is 7% and the market risk premium is 9%, what is Emma's portfolio's beta and required return? Fill in the following table: Beta Required Return Emma's portfolio

Explanation / Answer

Suppose all stocks on Emma's prtfolio were equally weighted . The stock with least market risk is Main Way Toys because it has the least beta of all stocks.

The stock with least standalone risk is Kulatsu Motors Co because it has the lowest standard deviation.

First we calculate weighted Beta of the 4 stocks Stock Investment Ratio to Total Investment Beta Weighted Beta (A) (B=A/10000) ('C) (D=B*C) Andalusion Limited 3500 0.35 0.9 0.315 Kulsatu motors co 2000 0.2 1.3 0.26 Three Waters Co 1500 0.15 1.1 0.165 Mainway Toys Co 3000 0.3 0.4 0.12 Total invested = 10000 1 0.86 Portfolio Beta = 0.86 Using CAPM Formula, Expected Return = Risk Free Rate + Beta (Market Risk Premium) = 0.07 + (0.86 *0.09) = 0.1474 or 14.74%

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