$12.$ Portfoliobeta and weights

Megan is an analyst at a wealth management firm. One of her 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. $35\%0\mathrm{.}6000\mathrm{.}23\%$

Arthur Inc. $20\%1\mathrm{.}5000\mathrm{.}27\%$

Lobster Supply Corp. $15\%1\mathrm{.}1000\mathrm{.}30\%$

Baque Co$.30\%0\mathrm{.}5000\mathrm{.}34\%$

Megan calculated the portfolio$$s beta as $0\mathrm{.}825$ and the portfolio$$s expected return as $8\mathrm{.}54\%.$

Megan thinks it will be a good idea to reallocate the funds in her client$$s portfolio. She recommends replacing Atteric Inc.$$s shares with the same amount in additional shares of Baque Co$.$ The risk$-$free rate is $4\mathrm{.}00\%,$ and the market risk premium is $5\mathrm{.}50\%.$

According to Megan$$s recommendation, assuming that the market is in equilibrium, how much will the portfolio$$s required return change?

$0\mathrm{.}24\%$

$0\mathrm{.}19\%$

$0\mathrm{.}22\%$

$0\mathrm{.}15\%$

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, Megan expects a return of $8\mathrm{.}37\%$ 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.$$s stock with Baque Co$.$s stock, Megan considers replacing Atteric Inc.$$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 $.$