Question

In: Finance

After coming to a final decision, World Wide Widget Manufacturing, Inc., has a stock portfolio that...

After coming to a final decision, World Wide Widget Manufacturing, Inc., has a stock portfolio that consists of the following positions. With betas shown for each stock. You have been asked to calculate and evaluate the risk of your portfolio beta and the required returns for your portfolio. The market return is expected to be 11 percent, and the risk free rate is 6 percent. What is the beta of the portfolio? Is this high- or low- risk portfolio? What’s the required return of the portfolio? Fill in the position, weight and portfolio beta columns for each company in the table below. Show calculation.

Shares Price Position Weight Beta W x Beta
Merck & Co. 150 61 1.62
Domino's 200 152 1.8
Macy's 300 36 1.42
Tesla 150 202 2.51
Totals 1

A.      Merck & co., Inc.                                              C. Macy’s Inc.

1.       Position:                                                                              1. Position:

2.       Weight:                                                                                 2. Weight

3.       W x beta                                                                              3. W x Beta

B.      Domino’s Pizza                                                  D. Tesla

1.       Postion:                                                                       1. Position

2.       Weight                                                                         2. Weight

3.       W X Beta                                                                      3. W X Beta

Total position:

Total W x Beta:

Expected return:

The risk of the portfolio:

Please show all calculations and double check the formula details.

Solutions

Expert Solution

Shares Price Market Value = shares x Price Position Weight Beta W x Beta
Merck & Co. 150 61 9150 4 0.1135 1.62 0.184
Domino's 200 152 30400 1 0.3769 1.80 0.678
Macy's 300 36 10800 3 0.1339 1.42 0.190
Tesla 150 202 30300 2 0.3757 2.51 0.943
Totals 80650 1 1.995

A.      Merck & co., Inc.   

1.       Position: 4  (Based on Market value as in table = 9150)   

2.       Weight =  Market value of Company/Market value of portfolio = 9150/80650 = 0.1135   

3.       W x beta =   0.1135 * 1.62 = 0.184  

B.      Domino’s Pizza   

1.       Postion: 1 (Based on Market value as in table = 30400)

2.       Weight =  Market value of Company/Market value of portfolio = 30400/80650 = 0.3769

3.       W X Beta = 0.3769 * 1.80 = 0.678

C.      Macy’s Inc.   

1.       Postion: 3 (Based on Market value as in table = 10800)

2.       Weight =  Market value of Company/Market value of portfolio = 10800/80650 = 0.1339

3.       W X Beta = 0.1339 * 1.42 = 0.190

D. Tesla   

1.       Postion: 2 (Based on Market value as in table = 30300)

2.       Weight =  Market value of Company/Market value of portfolio = 30300/80650 = 0.3757

3.       W X Beta = 0.3757 * 2.51 = 0.943

Total Position = Total Market value of Portfolio = 80,650

Total W X Beta ( Beta of Portfolio) = 0.184 + 0.678 + 0.190 + 0.943 = 1.995 (therefore ,it is a high risk portfolio)

Required Rate of Return ( portfolio) = Risk free rate + beta(market return - risk free rate)

= 6% + 1.995 (11% - 6%)

=15.975%


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