Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

9. Portfolio bets and weights Rafael is an analyst at a wealth management fem. One of his clients holds a $10,000 portfolio that consists of

image text in transcribed
image text in transcribed
image text in transcribed
9. Portfolio bets and weights Rafael is an analyst at a wealth management fem. One of his clients holds a $10,000 portfolio that consists of four stocis. The investment allocation in the portfolio Mong with the contribution of risk from each stock leolven in the following table: Stock Atteric Inc. (AL) Arthur Trust Inc. (AT) L Corp. (LC) Bague Co. (BC) Investment Allocation 35% 209 Beta 0.600 Standard Deviation 38.00% 42.00% 45.00% 19.00% 1.000 1.300 0.400 15 304 Rafael calculated the portfolios beta as 0.845 and the portfolio's required return as 8.6475% Rataet thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atterie 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, assuming that the market is in equilibrium, how much will the portfolio's required return change (Note: Do not round your intermediate calculations.) 0.4774 percentage points 0.2003 percentage points According to tel's recommendation, asuming that the market is in equilibrium, how much will the portfolios required return change (Note: Do not round your intermediate calculations.) @ 0.4774 percentage points O 0.300 percentage points 050 percentage points 00:4478 percentage points Analysts estimates on expected returns from equity Investments are based on several factors. These estimations are often indude schlective and, judgmental factors, because different analysts interpret data in Gifferent ways. Supose, based on the caminos comment of stock analysts, statel expects a retumet opon from the portfolio with the new weights. Does he think that the required return as compared to expected return 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's stock that has a higher beta than Atteric Inc. If everything else remains constant, the required return from the portfolio would MONU @ 0.3000 percentage points 0.3850 percentage points 0.4428 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 6.76% from the portfolio with the new weights, Does he think that the required return as compared to expected returns is undervalued, overvalued, or faitty valued? Undervalued Overvalued Faitly 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 required return from the portfolio would

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cash, Corruption And Economic Development

Authors: Vikram Vashisht

1st Edition

1032096888, 9781032096889

More Books

Students also viewed these Accounting questions