Question
In: Finance
Cheyenne holds a $10,000 portfolio that consists of four stocks. Her investment in each stock, as...
Cheyenne 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 |
|---|---|---|---|
| Omni Consumer Products Co. (OCP) | $3,500 | 0.80 | 15.00% |
| Kulatsu Motors Co. (KMC) | $2,000 | 1.90 | 11.00% |
| Western Gas & Electric Co. (WGC) | $1,500 | 1.10 | 16.00% |
| Mainway Toys Co. (MTC) | $3,000 | 0.50 | 28.50% |
Suppose all stocks in Cheyenne’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?
Mainway Toys Co.
Omni Consumer Products Co.
Kulatsu Motors Co.
Western Gas & Electric Co.
Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of standalone risk?
Omni Consumer Products Co.
Kulatsu Motors Co.
Mainway Toys Co.
Western Gas & Electric Co.
If the risk-free rate is 7% and the market risk premium is 9%, what is Cheyenne’s portfolio’s beta and required return? Fill in the following table:
|
Beta |
Required Return |
|
|---|---|---|
| Cheyenne’s portfolio | ? | ? |
Solutions
Expert Solution
1)
Because it has smallest beta
2)
Because it has the smallest std dev
3)
| Total Portfolio value = Value of OCP + Value of KMC + Value of WGC + Value of MTC |
| =3500+2000+1500+3000 |
| =10000 |
| Weight of OCP = Value of OCP/Total Portfolio Value |
| = 3500/10000 |
| =0.35 |
| Weight of KMC = Value of KMC/Total Portfolio Value |
| = 2000/10000 |
| =0.2 |
| Weight of WGC = Value of WGC/Total Portfolio Value |
| = 1500/10000 |
| =0.15 |
| Weight of MTC = Value of MTC/Total Portfolio Value |
| = 3000/10000 |
| =0.3 |
| Beta of Portfolio = Weight of OCP*Beta of OCP+Weight of KMC*Beta of KMC+Weight of WGC*Beta of WGC+Weight of MTC*Beta of MTC |
| Beta of Portfolio = 0.8*0.35+1.9*0.2+1.1*0.15+0.5*0.3 |
| Beta of Portfolio = 0.975 |
4)
| As per CAPM |
| expected return = risk-free rate + beta * (Market risk premium) |
| Expected return% = 7 + 0.975 * (9) |
| Expected return% = 15.78 |
jeff jeffy answered 1 year agoRelated Solutions
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