Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Brandon 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? Decrease or Increase
Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Brandon 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? Decrease or Increase
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%.
Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Brandon 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?
Decrease or Increase
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