Rafael is an analyst at a wealth management firm. One of his clients holds a $5,000 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. (Al) 35% Arthur Trust Inc. (AT) 20% Li Corp. (LC) 1.300 30.00% Baque Co. (BC) 30% 0.400 34.00% Rafael calculated the portfolio's beta as 0.8575 and the portfolio's expected return as 8.72%. Rafael 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%. Investment Allocation Beta Standard Deviation 0.750 23.00% 1.400 27.00% 15% According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Round your intermediate calculations to two decimal places.) 0.78 percentage points 0.53 percentage points 0.84 percentage points 0.68 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, Rafael expects a return of 6.54% 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? Overvalued Undervalued Fairly valued Suppose instead of replacing Atteric Inc's stock with Baque Co.'s stock, Rafael 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 beta would , and the required return from the portfolio would
Rafael is an analyst at a wealth management firm. One of his clients holds a $5,000 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. (Al) 35% Arthur Trust Inc. (AT) 20% Li Corp. (LC) 1.300 30.00% Baque Co. (BC) 30% 0.400 34.00% Rafael calculated the portfolio's beta as 0.8575 and the portfolio's expected return as 8.72%. Rafael 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%. Investment Allocation Beta Standard Deviation 0.750 23.00% 1.400 27.00% 15% According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Round your intermediate calculations to two decimal places.) 0.78 percentage points 0.53 percentage points 0.84 percentage points 0.68 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, Rafael expects a return of 6.54% 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? Overvalued Undervalued Fairly valued Suppose instead of replacing Atteric Inc's stock with Baque Co.'s stock, Rafael 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 beta would , and 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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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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Transcribed Image Text:Rafael is an analyst at a wealth management firm. One of his clients holds a $5,000 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
Investment Allocation Beta Standard Deviation
Atteric Inc. (Al)
35%
0.750 23.00%
Arthur Trust Inc. (AT) 20%
1.400 27.00%
Li Corp. (LC)
1.300 30.00%
Baque Co. (BC)
30%
0.400 34.00%
Rafael calculated the portfolio's beta as 0.8575 and the portfolio's expected return as 8.72%.
Rafael 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%.
15%
According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Round your intermediate calculations to two decimal places.)
0.78 percentage points
0.53 percentage points
0.84 percentage points
0.68 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, Rafael expects a return of 6.54% 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?
Overvalued
Undervalued
Fairly valued
Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Rafael 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 beta would_______, and the required return from the portfolio would
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