FINC331 Finance Question Paper

FINC331 Finance Question Paper
Please read the following discussion and complete the discussion. This is due tomorrow. Use this FINC 331 Wk 6 Discussion Table.xlsx to help you compute the portfolio weighted averages. (attached)
This week we are going to use the math for computing a weighted average and apply it to the investment model we learned about last week, the CAPM. Using a weighted average, you can manipulate the expected risk and return of a portfolio of stocks to match your personal risk tolerance. If you have a stock that has a relatively low Beta, you can use it to reduce the overall risk of a portfolio, even if the returns themselves are not super fantastic. For example, if you were to pair Ford with another higher beta stock, Ford’s low beta would help to off-set the risk of the other stock. Here is how to compute the beta and expected return of a portfolio…
% of portfolio
Beta
Contribution to portfolio Beta
Expected Return (CAPM)
Contribution to Portfolio Return
Ford
50%
1.03
.50 x 1.03 = 0.515
9.7%
.50 x .097 = .0485 = 4.85%
riskier stock
50%
2.2
.50 x 2.2 = 1.1
15.3%
.50 x .153 = .0765 = 7.65%
Portfolio Beta
.0.515 1.1 = 1.6
Portfolio Return
4.85% 7.65% = 12.5%
As you can see, the addition of Ford to a portfolio containing a riskier stock decreases the overall risk of the investments and still provides a respectable return of 12.5%.
Requirements
Complete the following tasks for this assignment:
· Visit the following website and take the https://pfp.missouri.edu/research/investment-risk-tolerance-assessment/
Make a note of your results. You will use this information for this activity.
· Revisit your post from last week on the CAPM. Review the Beta and the Expected return for the stock you chose. Evaluate how risky this stock seems in relation to your risk tolerance profile. In other words, if you are a conservative investor, but the stock you selected last week had a very high Beta, then you will want to reduce the risk of owning this stock by pairing it with a low Beta stock.
· Once you have decided whether or not you need to increase or decrease risk, go back to YahooFinance and research some possible stocks to add to your portfolio. Identify 1 or 2 stocks that you think would bring the overall risk of your portfolio within a comfortable range. Use this FINC 331 Wk 6 Discussion Table.xlsx to help you compute the portfolio weighted averages. (attached)
· Place the stock you used last week in the row marked “stock

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