9.

Lorenzo 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. (AT)	20%	1.400	42.00%
Lobster Supply Corp. (LSC)	15%	1.300	45.00%
Transfer Fuels Co. (TF)	30%	0.500	49.00%

Lorenzo calculated the portfolios beta as 0.888 and the portfolios expected return as 10.7720%.

Lorenzo 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 5.0000%, and the market risk premium is 6.5000%.

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

a) 0.4462%

b) 0.6578%

c) 0.5720%

d) 0.7093%

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, Lorenzo expects a return of 11.70% 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) Undervalued

c) Overvalued

Suppose instead of replacing Atteric Inc.s stock with Transfer Fuels Co.s stock, Lorenzo 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 risk would:

Increase

OR

Decrease