Financial Management Part 3: Stock Returns 6. Worldwide Widget Manufacturing, Inc., has decided to invest in some stock. As CFO, you’ve been asked to rev

Financial Management Part 3: Stock Returns

6. Worldwide Widget Manufacturing, Inc., has decided to invest in some stock. As CFO, you’ve been asked to rev

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Part 3: Stock Returns

6. Worldwide Widget Manufacturing, Inc., has decided to invest in some stock. As CFO, you’ve been asked to review the portfolio. First, you’ll need to measure the past performance of the investments. Then, measure the past return’s risk of the investment. Lastly, calculate the average return and risk of the portfolio.

The following table shows the annual returns for Company A and Company B, which are part of the investment portfolio you’re interested in.

 

Company A

Company B

Year 1

5.23%

13.51%

Year 2

8.91

−9.35

Year 3

7.32

2.44

Year 4

−15.81

3.12

Year 5

−8.32

14.81

Year 6

25.98

18.36

What’s the average return and standard deviation of returns for these two companies? What’s the average return and standard deviation of returns for the portfolio? What’s the average return of a portfolio consisting of 60 percent of Company A and 40 percent of Company B?

7. After coming to a final decision, Worldwide Widget Manufacturing, Inc., has a stock portfolio that consists of the following positions, with betas shown for each stock. You’ve been asked to calculate and evaluate the risk of the portfolio beta and the required return for your portfolio. The market return is expected to be 11 percent, and the risk-free rate is 6 percent.

 

Shares

Price

Position

Weight

Beta


W x Beta

Merck & Co., Inc.

150

61

?

?

1.62

?

Domino’s Pizza

200

152

?

?

1.8

?

Macy’s, Inc.

300

36

?

?

1.42

?

Tesla

150

202

?

?

2.51

?

Totals

 

 

?

1

?

?

What’s the beta of the portfolio? Is this a 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 above. Show your calculations.

A. Merck & Co., Inc.

1. Position:

2. Weight:

3. W × Beta:

B. Domino’s Pizza

1. Position:

2. Weight:

3. W × Beta:

C. Macy’s, Inc.

1. Position:

2. Weight:

3. W × Beta:

D. Tesla

1. Position:

2. Weight:

3. W × Beta:

Total Position:

Total W × Beta:

Expected Return:

The risk of the portfolio:

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