Question

This is so hard especially the BETA portfolio I cannot calculate.

Your investment portfolio consists of the following stocks
Investment Portfolio
Name	Price	Beta	# shares
Dow Chemical	$      59.72	1.34	15,000
Walmart	$      69.32	0.19	3,000
Boeing	$   128.00	1.36	8,000
Verizon	$      52.61	0.45	6,000
Consolidated Edison	$      74.00	0.17	3,000
Caterpillar	$      75.00	1.5	13,000
Deutsche bank	$      22.55	1.4	9,000
a)      What is the portfolio beta?
b)      What is the required return on the portfolio if the market return is 11 % and the risk free rate is 3% ?
c)      If you are risk averse (do not like risk), how will you reconstruct your portfolio to reduce the risk or beta in the portfolio you calculated
to get a beta between .5 and .6. Show how you will achieve this.
d) If you like risk show how you will reconstruct your portfolio to increase your risk (Beta) level to between 1.4 and 1.5
e) What will happen to your investment if the market goes up 10 % and down 10% for the portfolio beta you calculated in ( c ) and (d)
How much will be your gain and loss in the portfolio you constructed?.

Answer 1

a) Statement showing Portfolio beta

Name	Price	# shares	Total Value	Weightage	Beta	Portfolio Beta( Weightage*beta)
Dow Chemical	59.72	15000	895800	0.2331	1.34	0.312
Walmart	69.32	3000	207960	0.0541	0.19	0.010
Boeing	128	8000	1024000	0.2664	1.36	0.362
Verizon	52.61	6000	315660	0.0821	0.45	0.037
Consolidated Edison	74	3000	222000	0.0578	0.17	0.010
Caterpillar	75	13000	975000	0.2537	1.5	0.381
Deutsche bank	22.55	9000	202950	0.0528	1.4	0.074
			3843370			1.186

b) Required return = risk free return + beta(market return - risk free return)

=3% + 1.186(11%-3%)

=3% + 9.488%

=12.488%

c) To get beta beween 0.5 and 0.6, lets say we want to get beat of 0.55

Now present beta = 1.186

Required beta = 0.55

It should become = 0.55/1.186 = 46.37%

If 3843370 is 46.37% then total portfolio should be = 3843370/0.4637 = 8287703.309$

Thus additional zero risk investment to bring in = 8287703.309-3843370 = 4444333.309$

Statement showing beta

Name	Price	# shares	Total Value	Weightage	Beta	Portfolio Beta( Weightage*beta)
Dow Chemical	59.72	15000	895800	0.1081	1.34	0.145
Walmart	69.32	3000	207960	0.0251	0.19	0.005
Boeing	128	8000	1024000	0.1236	1.36	0.168
Verizon	52.61	6000	315660	0.0381	0.45	0.017
Consolidated Edison	74	3000	222000	0.0268	0.17	0.005
Caterpillar	75	13000	975000	0.1176	1.5	0.176
Deutsche bank	22.55	9000	202950	0.0245	1.4	0.034
Risk free investment			4444333.31	0.5363	0	0.000
			8287703.31			0.550

d)

To get beta beween 1.4 and 1.5, lets say we want to get beat of 1.45

Now present beta = 1.186

Required beta = 1.45

It should become = 1.45/1.186 = 122%

If 3843370 is 122% then total portfolio should be = 3843370/1.22 = 3143611.6$

Thus zero risk investment to disinvest =3843370-3143611.6 = 699758.4$

Statement showing beta

Name	Price	# shares	Total Value	Weightage	Beta	Portfolio Beta( Weightage*beta)
Dow Chemical	59.72	15000	895800	0.2850	1.34	0.382
Walmart	69.32	3000	207960	0.0662	0.19	0.013
Boeing	128	8000	1024000	0.3257	1.36	0.443
Verizon	52.61	6000	315660	0.1004	0.45	0.045
Consolidated Edison	74	3000	222000	0.0706	0.17	0.012
Caterpillar	75	13000	975000	0.3102	1.5	0.465
Deutsche bank	22.55	9000	202950	0.0646	1.4	0.090
Risk free investment			-699758.4	-0.2226	0	0.000
			3143611.6			1.450