I need help with this question. I think I have the first two parts correct (answ
ID: 2776160 • Letter: I
Question
I need help with this question. I think I have the first two parts correct (answers in bold) but I'm stummped on the last part by solving for beta and required return. Can you show me the steps?
Nick holds a $5,000 portfolio that consists of four stocks. His investment in each stock, as well as each stock’s beta, is listed in the following table:
Suppose all stocks in Nick’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?
Omni Consumer Products Co.
Mainway Toys 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?
Mainway Toys Co.
Kulatsu Motors Co.
Western Gas & Electric Co.
Omni Consumer Products Co.
If the risk-free rate is 6.0000% and the market risk premium is 7.5000%, what is Nick’s portfolio’s beta and required return? Fill in the following table:
Stock Investment Beta Standard Deviation Omni Consumer Products Co. (OCP) $1,750 0.80 15.0000% Kulatsu Motors Co. (KMC) $1,000 1.30 11.5000% Western Gas & Electric Co. (WGC) $750 1.15 16.0000% Mainway Toys Co. (MTC) $1,500 0.50 19.5000%Explanation / Answer
Beta = ($1,750 * 0.80 + $1,000 * 1.30 + $750 * 1.15 + $1,500 * 0.50) / $5,000
= 0.8625
Required return = Risk free rate + beta * Market risk premium
= 6% + 0.8625 * 7.5%
= 12.47%