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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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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