Question
In: Finance
Elle holds a $5,000 portfolio that consists of four stocks. Her investment in each stock, as...
Elle holds a $5,000 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 |
|---|---|---|---|
| Omni Consumer Products Co. (OCP) | $1,750 | 0.90 | 18.00% |
| Zaxatti Enterprises (ZE) | $1,000 | 1.50 | 11.00% |
| Western Gas & Electric Co. (WGC) | $750 | 1.10 | 18.00% |
| Mainway Toys Co. (MTC) | $1,500 | 0.60 | 22.50% |
Suppose all stocks in Elle’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?
Mainway Toys Co.
Zaxatti Enterprises
Western Gas & Electric Co.
Omni Consumer Products Co.
Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?
Western Gas & Electric Co.
Omni Consumer Products Co.
Zaxatti Enterprises
Mainway Toys Co.
If the risk-free rate is 7% and the market risk premium is 8.5%, what is Elle’s portfolio’s beta and required return? Fill in the following table:
|
Beta |
Required Return |
|
|---|---|---|
| Elle’s portfolio |
Solutions
Expert Solution
| Stock | Investment ($) | Weight working | Weight (W) | Beta | Standard deviation | W*Beta |
| OCP | 1750 | 1750/5000 | 0.35 | 0.9 | 18 | 0.315 |
| ZE | 1000 | 1000/5000 | 0.20 | 1.5 | 11 | 0.3 |
| WGC | 750 | 750/5000 | 0.15 | 1.1 | 18 | 0.165 |
| MTC | 1500 | 1500/5000 | 0.30 | 0.6 | 22.5 | 0.18 |
| Total | 5000 | 0.96 | ||||
| Suppose all stocks in Elle’s portfolio were equally weighted, Stock MTC would contribute the least market risk to the portfolio as its beta is lowest (beta is the measure of volatility of the stock in relation to market) | ||||||
| Suppose all stocks in the portfolio were equally weighted, Stock ZE would have the least amount of stand-alone risk because standard deviation measures firm specific risk and standard deviation of Stock ZE is the lowest. | ||||||
| Elle's portfolio beta= Weighted average=0.96 (See table) | ||||||
| Required return= Rf+Market risk premium*Portfolio beta | ||||||
| 7+8.5*0.96 | ||||||
| 15.16% |
jeff jeffy answered 1 year agoRelated Solutions
Cheyenne holds a $10,000 portfolio that consists of four stocks. Her investment in each stock, as...
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Her investment in each stock, as well as each stock’s beta, is
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Stock
Investment
Beta
Standard Deviation
Omni Consumer Products Co. (OCP)
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0.80
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1.10
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Mainway Toys Co. (MTC)
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0.50
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Beta
A
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Beta
# shares
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1.34
15,000
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0.19
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1.36
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1.5
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1.4
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to invest in stocks of oil refining industry because their prices
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a. Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager,...
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Andrew’s advice sound? Explain.
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