Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 portfolio that consists of four stocks. The investment allocation

Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 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 38.00%
Arthur Trust Inc. (AT) 20% 1.600 42.00%
Li Corp. (LC) 15% 1.300 45.00%
Baque Co. (BC) 30% 0.400 49.00%

Rafael calculated the portfolios beta as 0.845 and the portfolios required return as 8.6475%.

Rafael 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 4%, and the market risk premium is 5.50%.

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

0.3003 percentage points

0.4428 percentage points

0.4774 percentage points

0.3850 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 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 Xs 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

Step: 3

blur-text-image

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

Financial Markets And Institutions

Authors: Anthony Saunders, Marcia Millon Cornett

1st International Edition

0071181334, 9780071181334

More Books

Students also viewed these Finance questions

Question

Show that if n0 / N 1, the value of n in (2.25) satisfies

Answered: 1 week ago

Question

Understand the purpose and methods of cross-cultural training

Answered: 1 week ago