Andrew 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 Investment Allocation Beta Standard Deviation Atteric Inc. 35% 0.750 0.38% Arthur Inc. 20% 1.500 0.42% Li Corp. 15% 1.300 0.45% Baque Co. 30% 0.500 0.49% Andrew calculated the portfolio's beta as 0.908 and the portfolio's expected return as 10.90%. Andrew 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%. According to Andrew's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 0.66% 0.44% 0.71 % 0.57% 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, Andrew expects a return of 10.32% 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 Fairly valued Undervalued Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Andrew 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.
Andrew 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 Investment Allocation Beta Standard Deviation Atteric Inc. 35% 0.750 0.38% Arthur Inc. 20% 1.500 0.42% Li Corp. 15% 1.300 0.45% Baque Co. 30% 0.500 0.49% Andrew calculated the portfolio's beta as 0.908 and the portfolio's expected return as 10.90%. Andrew 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%. According to Andrew's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 0.66% 0.44% 0.71 % 0.57% 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, Andrew expects a return of 10.32% 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 Fairly valued Undervalued Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Andrew 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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Transcribed Image Text:Andrew 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 Investment Allocation
Beta Standard Deviation Atteric Inc. 35% 0.750 0.38%
Arthur Inc. 20% 1.500 0.42% Li Corp. 15% 1.300 0.45%
Baque Co. 30% 0.500 0.49% Andrew calculated the
portfolio's beta as 0.908 and the portfolio's expected
return as 10.90%. Andrew 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%. According to Andrew's recommendation,
assuming that the market is in equilibrium, how much
will the portfolio's required return change?
0.66% 0.44% 0.71% 0.57% 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,
Andrew expects a return of 10.32% 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
Fairly valued Undervalued Suppose instead of replacing
Atteric Inc.'s stock with Baque Co.'s stock, Andrew
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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