90.2K

Verified Solution

Link Copied!

Brandon is an analyst at a wealth management firm. One of his clients holds a $7,500 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table:

Stock

Investment Allocation

Beta

Standard Deviation

Atteric Inc. (AI)

35%

0.750

23.00%

Arthur Trust Inc. (AT)

20%

1.600

27.00%

Li Corp. (LC)

15%

1.100

30.00%

Transfer Fuels Co. (TF)

30%

0.300

34.00%

Brandon calculated the portfolios beta as 0.8375 and the portfolios expected return as 12.28%.

Brandon thinks it will be a good idea to reallocate the funds in his clients portfolio. He recommends replacing Atteric Inc.s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 6%, and the market risk premium is 7.50%.

According to Brandons recommendation, assuming that the market is in equilibrium, how much will the portfolios required return change? (Note: Round your intermediate calculations to two decimal places.)

0.92 percentage points

1.36 percentage points

1.46 percentage points

1.18 percentage points

Analysts estimates on expected returns from equity investments are based on several factors. These estimations also often include subjective and judgmental factors, because different analysts interpret data in different ways.

Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 12.60% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued?

Undervalued

Overvalued

Fairly valued

Suppose instead of replacing Atteric Inc.s stock with Transfer Fuels Co.s stock, Brandon considers replacing Atteric Inc.s stock with the equal dollar allocation to shares of Company Xs stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolios beta would ____, and the required return from the portfolio would _____

Last two options are increase/decrease

Answer & Explanation Solved by verified expert

See Answer