Gregory is an analyst at a wealth management firm. One of his clients holds a $7,500 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% 0.900 53.00% Arthur Trust Inc. (AT) 20% 1.400 57.00% Lobster Supply Corp. (LSC) 15% 1.100 60.00% Transfer Fuels Co. (TF) 30% 0.500 64.00% Gregory calculated the portfolio's beta as 0.910 and the portfolio's required return as 12.8250%. 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 Transfer Fuels Co. The risk-free rate is 6%, and the market risk premium is 7.50%. According to Gregory's recommendation, assuming that the market is in equilibrium, how much will the portfolia's required return change? (Note: Do not round your Intermediate calculations.) O 1.3020 percentage points 0.8190 percentage points 1.2075 percentage points O 1.0500 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, Gregory expects a return of 13.28% 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 Undervalued Fairly valued Overvalued Suppose Instead of replacing Atteric Inc.'s stock with Transfer Fuels 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 required return from the portfolio would
Gregory is an analyst at a wealth management firm. One of his clients holds a $7,500 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% 0.900 53.00% Arthur Trust Inc. (AT) 20% 1.400 57.00% Lobster Supply Corp. (LSC) 15% 1.100 60.00% Transfer Fuels Co. (TF) 30% 0.500 64.00% Gregory calculated the portfolio's beta as 0.910 and the portfolio's required return as 12.8250%. 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 Transfer Fuels Co. The risk-free rate is 6%, and the market risk premium is 7.50%. According to Gregory's recommendation, assuming that the market is in equilibrium, how much will the portfolia's required return change? (Note: Do not round your Intermediate calculations.) O 1.3020 percentage points 0.8190 percentage points 1.2075 percentage points O 1.0500 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, Gregory expects a return of 13.28% 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 Undervalued Fairly valued Overvalued Suppose Instead of replacing Atteric Inc.'s stock with Transfer Fuels 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 required return from the portfolio would
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
Problem 1PS
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Transcribed Image Text:Gregory is an analyst at a wealth management firm. One of his clients holds a $7,500 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%
0.900
53.00%
Arthur Trust Inc. (AT)
20%
1.400
57.00%
Lobster Supply Corp. (LSC)
15%
1.100
60.00%
Transfer Fuels Co. (TF)
30%
0.500
64.00%
Gregory calculated the portfolio's beta as 0.910 and the portfolio's required return as 12.8250%.
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 Transfer Fuels Co. The risk-free rate is 6%, and the market risk premium is 7.50%.
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.)
1.3020 percentage points
O 0.8190 percentage points
O 1.2075 percentage points
O 1.0500 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, Gregory expects a return of 13.28% 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
Fairly valued
Overvalued
Suppose instead of replacing Atteric Inc.'s stock with Transfer Fuels 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 required return from the
portfolio would
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Step 1: Define portfolio beta and CAPM
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VIEWStep 3: Calculation of required return on revised portfolio
VIEWStep 4: Calculation change in required return
VIEWStep 5: Decision as to portfolio is undervalued or overvalued
VIEWStep 6: Effect on required return of a higher beta stock
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