Gregory 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) Investment Allocation Beta Standard Deviation 35% 0.900 23.00% Arthur Trust Inc. (AT) 20% 1.600 27.00% Lobster Supply Corp. (LSC) 15% 1.100 30.00% Baque Co. (BC) 30% 0.300 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 different ways. Suppose, based on the earnings consensus of stock analysts, Gregory expects a return of 6.24% 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 Undervalued Fairly valued Gregory calculated the portfolio's beta as 0.890 and the portfolio's required return as 8.8950%. Gregory 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 Gregory'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 1.4322 percentage points O 1.1550 percentage points O 0.9009 percentage points O 1.3283 percentage points Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory considers replacing Atteric Inc.'s stock with the equal dollar allocation to shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolio's risk would
Gregory 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) Investment Allocation Beta Standard Deviation 35% 0.900 23.00% Arthur Trust Inc. (AT) 20% 1.600 27.00% Lobster Supply Corp. (LSC) 15% 1.100 30.00% Baque Co. (BC) 30% 0.300 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 different ways. Suppose, based on the earnings consensus of stock analysts, Gregory expects a return of 6.24% 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 Undervalued Fairly valued Gregory calculated the portfolio's beta as 0.890 and the portfolio's required return as 8.8950%. Gregory 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 Gregory'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 1.4322 percentage points O 1.1550 percentage points O 0.9009 percentage points O 1.3283 percentage points Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory considers replacing Atteric Inc.'s stock with the equal dollar allocation to shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolio's risk would
Chapter1: Making Economics Decisions
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Transcribed Image Text:Gregory 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)
Investment Allocation Beta
Standard Deviation
35%
0.900
23.00%
Arthur Trust Inc. (AT)
20%
1.600
27.00%
Lobster Supply Corp. (LSC)
15%
1.100
30.00%
Baque Co. (BC)
30%
0.300
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 different ways.
Suppose, based on the earnings consensus of stock analysts, Gregory expects a return of 6.24% 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
Undervalued
Fairly valued
Gregory calculated the portfolio's beta as 0.890 and the portfolio's required return as 8.8950%.
Gregory 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 Gregory'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 1.4322 percentage points
O 1.1550 percentage points
O 0.9009 percentage points
O 1.3283 percentage points
Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory considers replacing Atteric Inc.'s stock with the equal dollar allocation
to shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolio's risk would
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