question archive Emma holds a $10,000 portfolio that consists of four stocks
Emma holds a $10,000 portfolio that consists of four stocks
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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 |
Investment |
Beta |
Standard Deviation |
|---|---|---|---|
| Perpetualcold Refrigeration Co. (PRC) | $3,500 | 1.00 | 15.00% |
| Kulatsu Motors Co. (KMC) | $2,000 | 1.50 | 11.00% |
| Three Waters Co. (TWC) | $1,500 | 1.10 | 20.00% |
| Makissi Corp. (MC) | $3,000 | 0.50 | 22.50% |
Suppose all stocks in Emma’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?
Kulatsu Motors Co.
Perpetualcold Refrigeration Co.
Makissi Corp.
Three Waters Co.
Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?
Kulatsu Motors Co.
Makissi Corp.
Three Waters Co.
Perpetualcold Refrigeration Co.
If the risk-free rate is 7% and the market risk premium is 8.5%, what is Emma’s portfolio’s beta and required return? Fill in the following table:
|
Beta |
Required Return |
|
|---|---|---|
| Emma’s portfolio |
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Beta is a measure of market risk
Lowest beta is of Makissi Corp., hence it contributes lowest to market risk
Stand alone risk is measured by Standard Deviation
Hence, the answer is Kulatsu Motors Co. (KMC)
Portfolio beta is equal to weighted average beta
= 1*3500/10,000 + 1.50*2000/10,000 + 1.10*1500/10,000 + 0.50*3000/10,000
= 0.965
Required return = Risk free rate + beta*market risk premium
= 7% + 0.965*8.5%
= 15.2025%
