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ID: 2821450 • Letter: A
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Attempts: Keep the Highest: /4 Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more 5. Portfolio risk and return Emma holds a $5,000 portfolio that consts of four stocks. Her investment in each stock, as wellas each stock's beta, is listed in the following table: Stock Investment Perpetualooid Refrigeration Co. (PRC$1,750 Tobotics Inc. (TI) Three Waters Co. (TWC) Makissi Corp. (MC) Beta 0.80 1.50 110 0.30 Standard Deviation 9.00% 11.00% 16.00% 22.50% $1,000 $750 Suppase all stocks in Enma's portfolio were equallySuppose al stocs 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 portfolo? standalone risk? 0 Three waters Co. 0 Perpetualcold Refrigeration Co. O Tobatics Inc. O Perpetualcold Refrigeration Co. O Three Waters Co. O Makissi Corp Tobotics Inc. MakissiCarp. If the risk-free rate is 4% and the market nsk premium s 6%, what is Emma's portfolio's beta and required return? Fil in the following table: Beta Required Return Emma's portfolioYExplanation / Answer
Question 1: Multiple Choice Question
a) Market risk to portfolio - Beta of a stock signifies market risk associated with that stock. With lowest beta, Makissi Corp., would contribute lowest market risk to overall equally weighted portfolio.
b) Standalone risk to portfolio - Standard deviation of a stock signifies total risk associated with a stock. With lowest standard deviation, Perpetualcold Refrigeration would contribute lowest standalone risk to overall equally weighted portfolio.
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Question 2: For this question, we first need to calculate Beta of portfolio. Beta of portfolio is weighted average of the beta of individual stocks:
Beta of portolfio = (1,750/5000) * 0.80 + (1,000/5,000) * 1.50 + (750/5,000) * 1.10 + (1,500/5,000) * 0.30
Beta of portfolio = 0.28 + 0.30 + 0.165 + 0.09 = 0.835
Now, we need to apply CAPM, based on which:
Expected return on stock = Risk free rate + Beta * Market risk premium
Expected return on stock = 4% + 0.835 * 6% = 9.01%
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