Rafeal is an analyst at a wealth managemetn firm. One of his clients holds a $7500 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% 0.750 53.00% Arthur Trust Inc. (AT) 20% 1.400 57.00% Lobster Supply Corp. (LSC) 15% 1.100 60.00% Transfer Fuels Co. (TF) 30% 0.500 64.00%

Rafeal calculated the portfolio's beta as 0.858 and the portfolio's expected return at 8.72

Rafeal thinks it will be a good idea to reallocated the funds in his client's portfolio. He recommends replacing Atteric Inc.'s shares with the same amount in addiation shares of Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%.

According to Rafael's reccomendation, assuming that the market is in equalibrium, how much will the portfolios required return change?

A. 0.60 percentage points B. 0.48 percentage points C. 0.37 percentage points D. 0.55 percentage points

Analysts' estimates on expected returns from equity investments are based on several factors. These estimations also often include subjective and judgemental factos, because different analysts interpret data in different ways.

Suppose bassed on the earnings consensus of stock analysts, Rafeal expects a return of 9.74% from the portfolio with new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued?

A. Overvalued B. Undervalued C. Fairly Valued

Suppose instead of replacing Atteric Inc's stock with Transfer Fuels 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. everything else remains constant, the portfolio's risk would____________

A. Increase B. Decrease