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 6.13% 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? Undervalued Fairly valued Overvalued
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 6.13% 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? Undervalued Fairly valued Overvalued
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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Portfolio beta and weights
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
|
Investment Allocation
|
Beta
|
Standard Deviation
|
---|---|---|---|
Atteric Inc. ( |
35% | 0.750 | 38.00% |
Arthur Trust Inc. (AT) | 20% | 1.500 | 42.00% |
Li Corp. (LC) | 15% | 1.100 | 45.00% |
Baque Co. (BC) | 30% | 0.300 | 49.00% |
Brandon calculated the portfolio’s beta as 0.818 and the portfolio’s required return as 8.4990%.
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 Baque Co. The risk-free rate is 4%, and the market risk premium is 5.50%.
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.)
0.6778 percentage points
0.8690 percentage points
1.0776 percentage points
0.9994 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, Brandon expects a return of 6.13% 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?
Undervalued
Fairly valued
Overvalued
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