Assignment: Chapter $08$ Risk and Rate of Return

Sean is an analyst at a wealth management firm. One of his clients holds a $$7,500$ 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:

Sean calculated the portfolio's beta as $0\mathrm{.}832$ and the portfolio's expected return as $12\mathrm{.}24\%.$

Sean thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.$\text{'}$s shares with the same amount

in additional shares of Transfer Fuels Co$.$ The risk$-$free rate is $6\mathrm{.}00\%,$ and the market risk premium is $7\mathrm{.}50\%.$

According to Sean's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change?

$0\mathrm{.}92\%$

$1\mathrm{.}18\%$

$1\mathrm{.}46\%$

$1\mathrm{.}36\%$

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, Sean expects a return of $11\mathrm{.}08\%$ 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?