10. Portfolio beta and weights

Brandon 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. (AI)	35%	0.750	23.00%
Arthur Trust Inc. (AT)	20%	1.500	27.00%
Li Corp. (LC)	15%	1.100	30.00%
Transfer Fuels Co. (TF)	30%	0.500	34.00%

Brandon calculated the portfolios beta as 0.8775 and the portfolios expected return as 8.83%.

Brandon thinks it will be a good idea to reallocate the funds in his clients 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%.

1) According to Brandons recommendation, assuming that the market is in equilibrium, how much will the portfolios required return change? (Note: Round your intermediate calculations to two decimal places.)

A) 0.60 percentage points

B) 0.55 percentage points

C) 0.37 percentage points

D) 0.48 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.

2) Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 6.85% 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?

A) Fairly valued

B) Overvalued

C) Undervalued

Suppose instead of replacing Atteric Inc.s stock with Transfer Fuels Co.s stock, Brandon considers replacing Atteric Inc.s stock with the equal dollar allocation to shares of Company Xs stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolios beta would (decrease OR increase?) , and the required return from the portfolio would (decrease OR increase?)