Portfolio beta and weights Rafael is an analyst at a wealth management firm. One of his clients...

80.2K

Verified Solution

Question

Finance

Portfolio beta and weights
Rafael is an analyst at a wealth management firm. One of hisclients holds a $7,500 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% 0.750 23.00%
Arthur Trust Inc. (AT) 20% 1.600 27.00%
Lobster Supply Corp. (LSC) 15% 1.300 30.00%
Baque Co. (BC) 30% 0.300 34.00%
Rafael calculated the portfolio’s beta as 0.868 and theportfolio’s expected return as 8.7740%.
Rafael 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 Baque Co. Therisk-free rate is 4%, and the market risk premium is 5.50%.
According to Rafael’s recommendation, assuming that the marketis in equilibrium, how much will the portfolio’s required returnchange? (Note: Do not round your intermediate calculations.)
A. 0.9994 percentage points
B. 0.8690 percentage points
C. 0.6778 percentage points
D. 1.0776 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,Rafael expects a return of 6.41% from the portfolio with the newweights. Does he think that the required return as compared toexpected returns is undervalued, overvalued, or fairly valued?
A. Fairly valued
B. Overvalued
C. Undervalued
Suppose instead of replacing Atteric Inc.’s stock with BaqueCo.’s stock, Rafael considers replacing Atteric Inc.’s stock withthe equal dollar allocation to shares of Company X’s stock that hasa higher beta than Atteric Inc. If everything else remainsconstant, the required return from the portfolio would _________.(Increase or decrease)

Stock	Investment Allocation	Beta	Standard Deviation
Atteric Inc. (AI)	35%	0.750	23.00%
Arthur Trust Inc. (AT)	20%	1.600	27.00%
Lobster Supply Corp. (LSC)	15%	1.300	30.00%
Baque Co. (BC)	30%	0.300	34.00%

Answer & Explanation Solved by verified expert

4.3 Ratings (746 Votes)

SEE THE See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Portfolio beta and weightsRafael is an analyst at a wealth management firm. One of hisclients holds a $7,500 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:StockInvestment AllocationBetaStandard DeviationAtteric Inc. (AI)35%0.75023.00%Arthur Trust Inc. (AT)20%1.60027.00%Lobster Supply Corp. (LSC)15%1.30030.00%Baque Co. (BC)30%0.30034.00%Rafael calculated the portfolio’s beta as 0.868 and theportfolio’s expected return as 8.7740%.Rafael 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 Baque Co. Therisk-free rate is 4%, and the market risk premium is 5.50%.According to Rafael’s recommendation, assuming that the marketis in equilibrium, how much will the portfolio’s required returnchange? (Note: Do not round your intermediate calculations.)A. 0.9994 percentage pointsB. 0.8690 percentage pointsC. 0.6778 percentage pointsD. 1.0776 percentage pointsAnalysts’ 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,Rafael expects a return of 6.41% from the portfolio with the newweights. Does he think that the required return as compared toexpected returns is undervalued, overvalued, or fairly valued?A. Fairly valuedB. OvervaluedC. UndervaluedSuppose instead of replacing Atteric Inc.’s stock with BaqueCo.’s stock, Rafael considers replacing Atteric Inc.’s stock withthe equal dollar allocation to shares of Company X’s stock that hasa higher beta than Atteric Inc. If everything else remainsconstant, the required return from the portfolio would _________.(Increase or decrease)