6. Portfolio beta and weights

Rafael is an analyst at a wealth management firm. One of his 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. (AI)	35%	0.900	23.00%
Arthur Trust Inc. (AT)	20%	1.400	27.00%
Li Corp. (LC)	15%	1.100	30.00%
Transfer Fuels Co. (TF)	30%	0.300	34.00%

Rafael calculated the portfolios beta as 0.850 and the portfolios required return as 8.6750%.

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 Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%.

According to Rafaels recommendation, assuming that the market is in equilibrium, how much will the portfolios required return change? (Note: Do not round your intermediate calculations.)

1.3283 percentage points

1.1550 percentage points

0.9009 percentage points

1.4322 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 6.02% from the portfolio with the new weights. Does he think that the required return as compared to expected returns is undervalued, overvalued, or fairly valued?

Undervalued

Overvalued

Fairly valued

Suppose instead of replacing Atteric Inc.s stock with Transfer Fuels 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 .