12. Portfoliobeta and weightsMusashi is an analyst at a wealth management firm. One of his clients holds a $7,500 portfolio that consists of four stocks. The investment allocationin the portfolio along with the contribution of risk from each stock is given in the following table:StockAtteric Inc.Arthur Inc.Li Corp.Baque Co.0.91%Investment Allocation Beta0.900O 0.71%35%1.13%20%15%30%Musashi calculated the portfolio's beta as 0.960 and the portfolio's expected return as 11.24%.1.05%1.5001.3000.500Musashi 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 sameamount in additional shares of Baque Co. The risk-free rate is 5.00%, and the market risk premium is 6.50%.Standard DeviationAccording to Musashi's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change?0.53%0.57%0.60%0.64% Analysts' estimates on expected returns from equity investments are based on several factors. These estimations also often include subjective andjudgmental factors, because different analysts interpret data in different ways.Suppose, based on the earnings consensus of stock analysts, Musashi expects a return of 10.32% from the portfolio with the new weights. Does hethink that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued?Fairly valuedUndervaluedOvervaluedSuppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Musashi considers replacing Atteric Inc.'s stock with the equal dollar allocationto shares of Company X's stock that has a higher beta than Atteric Inc.. If everything else remains constant, the portfolio's beta wouldand the required return from the portfolio would

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Musashi 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 Atteric Inc. Arthur Inc. Li Corp. Baque Co. 0.91% Investment Allocation Beta 0.900 1.500 1.300 0.500 0.71% 35% 20% Musashi calculated the portfolio's beta as 0.960 and the portfolio's expected return as 11.24%. 1.13% 15% 30% Musashi 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%. 1.05% Standard Deviation According to Musashi's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 0.53% 0.57% 0.60% 0.64%

Musashi 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 Atteric Inc. Arthur Inc. Li Corp. Baque Co. 0.91% Investment Allocation Beta 0.900 1.500 1.300 0.500 0.71% 35% 20% Musashi calculated the portfolio's beta as 0.960 and the portfolio's expected return as 11.24%. 1.13% 15% 30% Musashi 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%. 1.05% Standard Deviation According to Musashi's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 0.53% 0.57% 0.60% 0.64%

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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Keith holds a portfolio that is invested equally in three stocks (wDwD = wAwA = wIwI = 1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return DET 0.7 25% 8.0% AIL 1.0 38% 10.0% INO 1.6 34% 13.5% An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst’s expected return estimates may or may not equal the stocks’ required returns. The risk-free rate [rRFrRF] is 6%, and the market risk premium [RPMRPM] is 4%. Use the following graph with the security market line (SML) to plot each stock’s beta and expected return. (Note: Click on the points on the graph to see their coordinates.) Stock DETStock AILStock INO00.20.40.60.81.01.21.41.61.82.020181614121086420RATE OF RETURN (Percent)RISK (Beta) A stock is in equilibrium if its required return its expected return. In general, assume that markets and stocks are in equilibrium (or fairly valued),…
Nancy works as a wealth manager. A new client has provided Nancy with the following information about their portfolio: STOCK Holding Beta Wal-Mart $47, 000 0.35 Disney $ 39,000 1.01 Tesla $59, 000 1.93 What is the beta of the client's portfolio?
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As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risktolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX Portfolio Stock Bond ER o^2 1 5% 95% 8% 5% 2 25% 75% 9% 10% 3 70% 30% 10% 16% 4 90% 10% 11% 25% a. Calculate the expected utility of each prospective portfolio for each of the two clients. b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Explain why there is a difference in these two outcomes. c. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic allocation? Demonstrate.
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Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 2.00%. What rate of return should investors expect (and require) on this fund? Do not round your intermediate calculations. Stock A B C D 11.16% 10.82% 9.93% 9.37% 9.71% Amount $1,075,000 $675,000 $750,000 $500,000 $3,000,000 Beta 1.20 0.50 1.40 0.75
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Neha is an analyst at a wealth management firm. One of her 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% 0.750 0.53% Arthur Inc. 20% 1.400 0.57% Li Corp. 15% 1.300 0.60% Transfer Fuels Co. 30% 0.300 0.64% Neha calculated the portfolio’s beta as 0.828 and the portfolio’s expected return as 8.55%. Neha thinks it will be a good idea to reallocate the funds in her client’s portfolio. She recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4.00%, and the market risk premium is 5.50%. 1. According to Neha’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? 0.86% 0.67% 1.07% 0.99%…
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Mr. Ota is an analyst for a large pension fund and he has been assigned the task of evaluating two different external portfolio managers (K and C). He considers the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Actual Average Standard deviation Portfolio Beta Return Manager K Manager C 7.80% 10.05% 0.75 12.0% 15.50% 1.45 Additionally, Mr. Ota estimate for the risk premium for the market portfolio is 5.40% and the risk-free rate is currently 2.50%. a. For both Managers K and C, calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e., xX.XX%)

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