Portfolio beta and weights

Antonio 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:

Stock	Investment Allocation	Beta	Standard Deviation
Atteric Inc. (AI)	35%	0.900	0.38%
Arthur Trust Inc. (AT)	20%	1.600	0.42%
Lobster Supply Corp. (LSC)	15%	1.300	0.45%
Baque Co. (BC)	30%	0.500	0.49%

Antonio calculated the portfolios beta as 0.980 and the portfolios expected return as 13.35%.

Antonio 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 6.00%, and the market risk premium is 7.50%.

According to Antonios recommendation, assuming that the market is in equilibrium, the portfolios 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, Antonio expects a return of 12.29% 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?

Fairly valued

Undervalued

Overvalued

Suppose instead of replacing Atteric Inc.s stock with Baque Co.s stock, Antonio 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 beta would , and the required return from the portfolio would