CHAP 8 - Q12

12. Portfolio beta and weights Kenji is an analyst at a wealth management firm. One of his clients holds = 57,500 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: Stock Atteric Inc. (AI) Investment Allocation 3594 20% Beta 0.500 1.400 Standard Deviation 0.53% 0.57% Arthur Trust Inc(AT) Li Corp. (LC) Transfer Fuels Co. (TF) 1506 1.200 0.400 0.60% 0.54% 30% Kenji calculated the portfolio's beta 25 0.790 and the portfolio's expected return as 8.359 Kenji thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4.009, and the market risk premium is 5.50%. According to Kenji's recommendation, assuming that the market is in equilibrium, the portfolio's required return will change by . 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, Kenji expects a return of 7.98% 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? Undervalued Overvalued Fairly valued Suppose instead of replacing Atteric Inc.'s stock with Transfer Fuels Co.'s stock, Kenji 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 portfolio's bets would and the required return from the portfolio would