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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	Weight	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.

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%

jeff jeffy answered 1 year ago

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