Question 3 - 13 marks

The same investor would like you to explain how volatile GAZ is, and how they might use this knowledge to alter their existing stock portfolio.They have shown you the following data on their existing stock portfolio:

Stock

$ Value

Beta

Stock A

$8,000

1.10

Stock B

$53,000

0.80

Stock C

$19,000

1.50

a)Outline what a beta co-efficient implies about the volatility of a company's shares relative to the overall market. Include the beta co-efficient of the market as a whole in your answer.

b)With regard to Stock A above, state mathematically what its beta coefficient of 1.10 implies about the volatility of the company's shares relative to the overall market?

c)Calculate the market risk (Beta) of the current portfolio and explain what the figure you calculated means.

d)If the investor bought $20,000 shares in GAZ and GAZ had a beta of 0.9, recalculate the new portfolio beta and explain how this will impact on the market risk of the portfolio?