3. Portfolio beta and weights

Rafael 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. (AI)	35%	0.750	38.00%
Arthur Trust Inc. (ATI)	20%	1.400	42.00%
Lobster Supply Corp. (LSC)	15%	1.300	45.00%
Baque Co. (BC)	30%	0.500	49.00%

Rafael calculated the portfolios beta as 0.888 and the portfolios expected return as 12.66%.

Rafael 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 Baque Co. The risk-free rate is 6%, and the market risk premium is 7.50%.

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

A) 0.76 percentage points

B) 0.82 percentage points

C) 0.66 percentage points

D) 0.51 percentage points

Suppose instead of replacing Atteric Inc.s stock with Baque Co.s stock, Rafael 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 _____ .

Please provide step-by step tutorial. Thanks :)