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Gregory is an analyst at a wealth management firm. One of hisclients holds a $10,000 portfolio that consists of four stocks. Theinvestment allocation in the portfolio along with the contributionof risk from each stock is given in the following table:

Stock	Investment Allocation	Beta	Standard Deviation
Atteric Inc. (AI)	35%	0.600	38.00%
Arthur Trust Inc.(AT)	20%	1.500	42.00%
Li Corp. (LC)	15%	1.100	45.00%
Transfer Fuels Co. (TF)	30%	0.500	49.00%

Gregory calculated the portfolio’s beta as 0.825 and theportfolio’s expected return as 12.19%.

Gregory thinks it will be a good idea to reallocate the funds inhis client’s portfolio. He recommends replacing Atteric Inc.’sshares with the same amount in additional shares of Transfer FuelsCo. The risk-free rate is 6%, and the market risk premium is7.50%.

According to Gregory’s recommendation, assuming that the marketis in equilibrium, how much will the portfolio’s required returnchange?

0.26 percentage points

0.20 percentage points

0.32 percentage points

0.30 percentage points

Analysts’ estimates on expected returns from equity investmentsare based on several factors. These estimations also often includesubjective and judgmental factors, because different analystsinterpret data in different ways.

Suppose, based on the earnings consensus of stock analysts,Gregory expects a return of 13.43% from the portfolio with the newweights. Does he think that the revised portfolio, based on thechanges he recommended, is undervalued, overvalued, or fairlyvalued?

Undervalued

Fairly valued

Overvalued

Suppose instead of replacing Atteric Inc.’s stock with TransferFuels Co.’s stock, Gregory considers replacing Atteric Inc.’s stockwith the equal dollar allocation to shares of Company X’s stockthat has a higher beta than Atteric Inc. If everything else remainsconstant, the portfolio’s beta would   .