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 Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation O 0.9009 percentage points O 1.4322 percentage points 1.1550 percentage points 1.3283 percentage points 35% 20% 15% 30% Fairly valued Beta Standard Deviation 0.900 1.400 Rafael calculated the portfolio's beta as 0.850 and the portfolio's required return as 8.6750%. 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 Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%. O Undervalued 1.100 0.300 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.) 23.00% 27.00% 30.00% 34.00% 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 in different ways. ata Suppose, based on the earnings consensus of stock analysts, Rafael expects a return of 6.02% 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? O Overvalued
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 Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation O 0.9009 percentage points O 1.4322 percentage points 1.1550 percentage points 1.3283 percentage points 35% 20% 15% 30% Fairly valued Beta Standard Deviation 0.900 1.400 Rafael calculated the portfolio's beta as 0.850 and the portfolio's required return as 8.6750%. 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 Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%. O Undervalued 1.100 0.300 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.) 23.00% 27.00% 30.00% 34.00% 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 in different ways. ata Suppose, based on the earnings consensus of stock analysts, Rafael expects a return of 6.02% 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? O Overvalued
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:# 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. (A1) | 35% | 0.900| 23.00% |
| Arthur Trust Inc. (AT)| 20% | 1.400| 27.00% |
| Li Corp. (LC) | 15% | 1.100| 30.00% |
| Transfer Fuels Co. (TF)| 30% | 0.300| 34.00% |
Rafael calculated the portfolio’s beta as 0.850 and the portfolio’s required return as 8.6750%.
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 Transfer Fuels 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.)
- ☐ 0.9009 percentage points
- ☐ 1.4322 percentage points
- ☐ 1.1550 percentage points
- ☐ 1.3283 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, Rafael expects a return of 6.02% 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?
- ☐ Overvalued
- ☐ Fairly valued
- ☐ Undervalued
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