Jacques 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. 35% 0.600 0.23% Arthur Inc. 20% 1.400 0.27% Lobster Supply Corp. 15% 1.100 0.30% Baque Co. 30% 0.400 0.34%
Jacques 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. 35% 0.600 0.23% Arthur Inc. 20% 1.400 0.27% Lobster Supply Corp. 15% 1.100 0.30% Baque Co. 30% 0.400 0.34%
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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1.) According to Jacques’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? _______
2.) Suppose, based on the earnings consensus of stock analysts, Jacques expects a return of 9.57% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued? _______
3.) Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Jacques 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 _______
Transcribed Image Text:Jacques 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. | 35% | 0.600 | 0.23% |
| Arthur Inc. | 20% | 1.400 | 0.27% |
| Lobster Supply Corp. | 15% | 1.100 | 0.30% |
| Baque Co. | 30% | 0.400 | 0.34% |
This table provides a snapshot of a diversified portfolio managed by Jacques. The portfolio's investment allocation is distributed among four different stocks, each with varying levels of risk as indicated by their Beta and Standard Deviation. The Beta value indicates each stock's volatility in relation to the market, while the Standard Deviation measures the level of variation or dispersion from the average.
![**Portfolio Analysis and Reallocation Recommendation**
Jacques calculated the portfolio’s beta as 0.775 and the portfolio’s expected return as 10.04%.
Jacques 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 5.00%, and the market risk premium is 6.50%.
**Question 1: Portfolio’s Required Return Change**
According to Jacques’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change?
- ○ 0.46%
- ○ 0.36%
- ○ 0.57%
- ○ 0.53%
**Analysts’ Estimates on Expected Returns**
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.
**Question 2: Portfolio Valuation with New Weights**
Suppose, based on the earnings consensus of stock analysts, Jacques expects a return of 9.57% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued?
- ○ Fairly valued
- ○ Undervalued
- ○ Overvalued
**Consideration of Portfolio Risk**
Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Jacques 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:
[Please adjust and refer to context for further insights.]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb23e2c4f-efaa-417a-9351-1cf888c16925%2F89a3a5b6-8036-4d1f-ad24-50374f17d6bf%2Fhcoigdt_processed.png&w=3840&q=75)
Transcribed Image Text:**Portfolio Analysis and Reallocation Recommendation**
Jacques calculated the portfolio’s beta as 0.775 and the portfolio’s expected return as 10.04%.
Jacques 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 5.00%, and the market risk premium is 6.50%.
**Question 1: Portfolio’s Required Return Change**
According to Jacques’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change?
- ○ 0.46%
- ○ 0.36%
- ○ 0.57%
- ○ 0.53%
**Analysts’ Estimates on Expected Returns**
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.
**Question 2: Portfolio Valuation with New Weights**
Suppose, based on the earnings consensus of stock analysts, Jacques expects a return of 9.57% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued?
- ○ Fairly valued
- ○ Undervalued
- ○ Overvalued
**Consideration of Portfolio Risk**
Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Jacques 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:
[Please adjust and refer to context for further insights.]
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