Ariel holds a $5,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stockâs beta, is listed in the following table:
Stock Investment Beta Standard Deviation
Andalusian Limited (AL) $1,750 0.90 18.00%
Tobotics Inc. (TI) $1,000 1.30 11.00%
Water and Power Co. (WPC) $750 1.10 18.00%
Flitcom Corp. (FC) $1,500 0.60 19.50%
Required:
1. Suppose all stocks in Arielâs portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?
O Water and Power Co.
O Flitcom Corp.
O Tobotics Inc.
O Andalusian Limited
2. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?
O Flitcom Corp.
O Andalusian Limited
O Water and Power Co.
O Tobotics Inc.

1) Flitcom Corp (Beta = 0.60)

2) Tobotics Inc. (s.d. = 11%)

Explanation:

1. Suppose all stocks in Ariel's portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?

The indicator of the market risk is the Beta. It relates the variation of the price or value of the stock relative to the variation of the total stocks in the market.

The value of Beta indicates how risky is a stock relative to the risk of the market. A Beta =1 means it has the same systemic risk as the market. If Beta<1, the stock is less volatile than the market, and if Beta>1, it is more volatile than the market.

Then, the stock with less value of Beta will contribute the least risk to the portfolio.

This is the case of Flitcom Corp (Beta=0.60)

2. Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?

The stand-alone is reflected by the standard deviation. The less the standard deviation, the less risk of the stock (measured only the stock variability).

This is the case of Tobotics Inc. (s.d. = 11%)