Brandon 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. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation 35% 20% 15% 30% Beta 0.900 1.500 1.300 0.400 Standard Deviation 38.00% 42.00% 45.00% 49.00% Brandon calculated the portfolio's beta as 0.930 and the portfolio's required return as 9.1150%. Brandon 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
Brandon 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. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation 35% 20% 15% 30% Beta 0.900 1.500 1.300 0.400 Standard Deviation 38.00% 42.00% 45.00% 49.00% Brandon calculated the portfolio's beta as 0.930 and the portfolio's required return as 9.1150%. Brandon 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
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.
Question
Transcribed Image Text:Brandon 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. (AI)
Arthur Trust Inc. (AT)
Li Corp. (LC)
Transfer Fuels Co. (TF)
Investment Allocation
35%
20%
15%
30%
O 1.1069 percentage points
1.1935 percentage points
O 0.9625 percentage points
O 0.7508 percentage points
Beta
0.900
1.500
1.300
0.400
Standard Deviation
Brandon calculated the portfolio's beta as 0.930 and the portfolio's required return as 9.1150%.
Brandon 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 4%, and the market risk premium is 5.50%.
O Overvalued
O Undervalued
O Fairly valued
38.00%
42.00%
45.00%
49.00%
According to Brandon'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.)
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, Brandon expects a return of 9.65% 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?
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