9. Portfolio beta and weights Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 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% 0.600 38.00% Arthur Trust Inc. (AT) 20% 1.600 42.00% LI Corp. (LC) 15% 1.300 45.00% Baque Co. (BC) 0.400 30% 49.00% Rafael calculated the portfolio's beta as 0.845 and the portfolio's required return as 8.6475%. Rafael thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4%, and the market risk premium is 5.50%. According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Do not round your intermediate calculations.) O 0.4774 percentage points O 0.3003 percentage points O 0.3850 percentage points O 0.4428 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 difrrerent ways. Suppose, based on the earnings consensus of stock analysts. Rafael expects a return of 6.76% from the portfolio with the new weights, Does he think
9. Portfolio beta and weights Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 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% 0.600 38.00% Arthur Trust Inc. (AT) 20% 1.600 42.00% LI Corp. (LC) 15% 1.300 45.00% Baque Co. (BC) 0.400 30% 49.00% Rafael calculated the portfolio's beta as 0.845 and the portfolio's required return as 8.6475%. Rafael thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4%, and the market risk premium is 5.50%. According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Do not round your intermediate calculations.) O 0.4774 percentage points O 0.3003 percentage points O 0.3850 percentage points O 0.4428 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 difrrerent ways. Suppose, based on the earnings consensus of stock analysts. Rafael expects a return of 6.76% from the portfolio with the new weights, Does he think
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:### 9. Portfolio Beta and Weights
Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 portfolio consisting of four stocks. The investment allocation in the portfolio and the contribution of risk from each stock is shown in the table below:
| Stock | Investment Allocation | Beta | Standard Deviation |
|---------------|------------------------|------|--------------------|
| Atteric Inc. (A1) | 35% | 0.600| 38.00% |
| Arthur Trust Inc. (AT) | 20% | 1.600| 42.00% |
| Li Corp. (LC) | 15% | 1.300| 45.00% |
| Baque Co. (BC) | 30% | 0.400| 49.00% |
Rafael calculated the portfolio's beta as 0.845 and the portfolio's required return as 8.6475%.
Rafael thinks reallocating the funds in his client’s portfolio would be beneficial. He recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4%, and the market risk premium is 5.50%.
**Question:**
Based on Rafael's recommendation and assuming the market is in equilibrium, by how much will the portfolio's required return change? (Note: Do not round your intermediate calculations.)
- 0.4774 percentage points
- 0.3003 percentage points
- 0.3850 percentage points
- 0.4428 percentage points
Analysts’ estimates on expected returns from equity investments are based on several factors. These estimations often include subjective and judgmental factors, leading to different interpretations by various analysts.
Suppose, based on the consensus of stock analysts, Rafael expects a return of 6.76% from the portfolio with the new weights. Does he think that the required return as compared to expected returns is undervalued, overvalued, or fairly valued?
- Undervalued
- Overvalued
- Fairly valued
Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Rafael considers replacing Atteric Inc.’s stock with the equal dollar allocation to shares of Company X's stock that has a higher beta than Atter
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