12. Portfolio beta and weights

Frances is an analyst at a wealth management firm. One of her clients holds a $10,000 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	0.38%
Arthur Inc.	20%	1.400	0.42%
Li Corp.	15%	1.100	0.45%
Baque Co.	30%	0.500	0.49%

Frances calculated the portfolios beta as 0.858 and the portfolios expected return as 8.72%.

Frances thinks it will be a good idea to reallocate the funds in her clients portfolio. She recommends replacing Atteric Inc.s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4.00%, and the market risk premium is 5.50%.

According to Francess recommendation, assuming that the market is in equilibrium, how much will the portfolios required return change?

0.55%

0.37%

0.48%

0.60%

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, Frances expects a return of 8.26% 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?

Undervalued

Overvalued

Fairly valued

Suppose instead of replacing Atteric Inc.s stock with Baque Co.s stock, Frances 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 , and the required return from the portfolio would .