5. Portfolio risk and return Aa Aa Ariel holds a $7,500 portfolio that consists of four stocks. Her investment in each stock, as well as each stock's beta, is listed in the following table: Stock Beta Standard Deviation Investment Perpetualcold Refrigeration Co. (PRC) $2,625 0.80 12.00% Zaxatti Enterprises (ZE) $1,500 1.30 11.50% Western Gas & Electric Co. (WGC) $1,125 1.15 16.00% Makissi Corp. (MC) $2,250 0.40 19.50% Suppose all stocks in Ariel's portfolio were equally Suppose all stocks in the portfolio were equally weighted. weighted. Which of these stocks would contribute the Which of these stocks would have the least amount of least market risk to the portfolio? standalone risk? Zaxatti Enterprises Perpetualcold Refrigeration Co. Makissi Corp. Makissi Corp. Perpetualcold Refrigeration Co. Western Gas & Electric Co. Zaxatti Enterprises Western Gas & Electric Co. If the risk-free rate is 4% and the market risk premium is 6%, what is Ariel's portfolio's beta and required return? Fill in the following ta ble: Required Return Beta Ariel's portfolio 6. Portfolio beta and weights A Aa 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: Standard Investment Stock Allocation Beta Deviation Atteric Inc. (AI) 35% 0.750 23.00% Arthur Trust Inc. (AT) 27.00% 20% 1.500 Lobster Supply Corp. (LSC) 15% 1.100 30.00% aque Co. (BC) 30% 0.300 34.00% Rafael calculated the portfolio's beta as 0.818 and the portfolio's expected return as 8.50%. Rafael 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% According to Rafael's recommendation, that the market is in equilibrium, how much will the port required return change? 0.68 percentage points 0.87 percentage points 1.08 percentage points 1.00 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. Suppose, based on the earnings consensus of stock analysts, Rafael expects a return of 9.13% 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, Rafael 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 risk would
