Mary holds a $10,000 portfolio that consists of four stocks. Her investment in e

ID: 2700435 • Letter: M

Question

Mary holds a $10,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stock's beta, is the following:

Stock Investment Beta Standard Deviation

Andalusian Limited (AL) $3,500 .90 9.00%

Tobotics Inc. (TI) $2,000 1.70 11.50%

Water & Power Co (WPC) $1,500 1.15 18.00%

Mainway Toys (MTC) $3,000 .30 25.50%

1. Suppose all stocks in Mary's portfolio are equally weighted. Which of these stocks would contribute the LEAST MARKET RISK to the porfolio?

2. Suppose all stocks in Mary's portfolio are equally weighted. Which of these stocks would contribute the LEAST AMOUNT of STAND ALONE RISK?

3. If the risk-free rate is 7% and the market risk premium is 9%, what is Mary's portfolio BETA and REQUIRED RETURN?

Hi,

Please find the answer as follows:

Part A:

Mainway Toys would contribute to the least market risk as its beta is very low.

Part B:

Andalusian Limited (AL) would contribute to the least standalone risk as its standard deviation is the lowest.

Part C:

Portfolio Beta = (3500*.90 + 2000*1.70 + 1500*1.15 + 3000*.30)/(3500 + 2000 + 1500 + 3000) = .9175

Required Rate of Return = 7 + .9175*(9) = 15.2575% or 15.26%

Thanks.