Ele holds a $10, 000 portfolio that consists of four stocks. Her investment in e
ID: 2733979 • Letter: E
Question
Ele 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: Suppose all stocks in Elle's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio? Andalusian Limited Main way Toys Co. Western Gas & Electric Co. Kulatsu Motors Co. Suppose all stocks in the portfolio were equally weighted, which of these stocks would have the least amount of standalone risk? Main way Toys co. Western Gas & Electric Co. Andalusian Limited Kulatsu Motors Co. If the risk-free rate is 7% and the market risk premium is 9%, what is Elle's portfolio's beta and required return? Fill in the following table:Explanation / Answer
Portfolio beta would be weighted average of investment and beta.
Portfolio Beta = sum of investment x beta / sum of investment
Stock
Investment
Beta
Investment x Beta
Al
3500
0.8
2800
KMC
2000
1.3
2600
WGC
1500
1.15
1725
MTC
3000
0.5
1500
10000
8625
Portfolio beta = 8625/ 10,000
= 0.8625
Required return = Rf + (Rm –Rf) x beta
= 7% + (9%- 7%) x 0.8625
=7% + 1.725
= 8.725%
Stock
Investment
Beta
Investment x Beta
Al
3500
0.8
2800
KMC
2000
1.3
2600
WGC
1500
1.15
1725
MTC
3000
0.5
1500
10000
8625
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