9. Portfolio beta and weights

Gregory 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%	0.600	53.00%
Arthur Trust Inc. (AT)	20%	1.500	57.00%
Lobster Supply Corp. (LSC)	15%	1.200	60.00%
Baque Co. (BC)	30%	0.500	64.00%

Gregory calculated the portfolios beta as 0.840 and the portfolios expected return as 12.3000%.

Gregory 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%.

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

0.2048 percentage points

0.2625 percentage points

0.3019 percentage points

0.3255 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.

2. Suppose, based on the earnings consensus of stock analysts, Gregory expects a return of 13.54% 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?

Overvalued

Undervalued

Fairly valued

Suppose instead of replacing Atteric Inc.s stock with Baque Co.s stock, Gregory 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 required return from the portfolio would ___________ . (decrease or increase)