1. Suppose your portfolio is comprised of 1,000 shares of American Airlines, 1,0
ID: 2818690 • Letter: 1
Question
1. Suppose your portfolio is comprised of 1,000 shares of American Airlines, 1,000 shares of Delta
Airlines, and 1,000 shares of United Airlines. The beta for American is 3.85, for, Delta it is 1.33,
and for United it is 1.71. The stock price for American is $42, for Delta is $44.50, and for United
is $56. Find the beta of your portfolio.
2. You are analyzing a stock that has a beta of 1.2. The risk free rate is 5% and you estimate the
market risk premium to be 6%. If you are absolutely sure the stock will have a return of 11% over
the next year, should you buy or sell the stock?
3. Suppose you expect the stock market will do very well next year. Would you rather own stocks
with high beta or low beta?
4. Suppose your investment portfolio is comprised of the Russell 1000 Index ETF—this index
represents the 1000 largest publicly traded firms in the U.S.—with ticker IWF. You are thinking of
buying one (and only one) of the following assets: stock of Tesla (ticker TSLA), stock of Best Buy
(BBY), or a Treasury Bonds ETF (IEF). Your new portfolio will be comprised of 90% IWF with
the rest in the asset you buy.
Below are average returns, standard deviations, and correlations based on monthly returns for the
past five years. Would you buy one of the three assets? If so, which asset would you buy? Explain.
(Note: think in terms of the Sharpe ratio).
Expected Return Standard Deviation Correlations IWF TSLA BBY IEF 1 .375% 1.692% 1.988% 0.206% 3.004% 12.170% 9.352% 1.458% 1.00 0.27 1.00 0.25 0.03 1.00 -0.18 -0.03-0.31 1.00Explanation / Answer
Answer to Question 1.
Number of American Airlines Share = 1,000 Share
Value of American Airlines Share = 1,000 * $42
Value of American Airlines Share = $42,000
Number of Delta Airlines Share = 1,000 Share
Value of Delta Airlines Share = 1,000 * $44.50
Value of Delta Airlines Share = $44,500
Number of United Airlines Share = 1,000 Share
Value of United Airlines Share = 1,000 * $56
Value of United Airlines Share = $56,000
Value of Portfolio = $42,000 + $44,500 + $56,000
Value of Portfolio = $142,500
Portfolio Beta = (Weight of Stock1 * Beta of Stock1) + (Weight of Stock2 * Beta of Stock2) + (Weight of Stock3 * Beta of Stock3)
Portfolio Beta = (42,000 / 142,500 * 3.85) + (44,500 / 142,500 * 1.33) + (56,000 / 142,500 * 1.71)
Portfolio Beta = 1.1347 + 0.4153 + 0.6720
Portfolio Beta = 2.22
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