Suppose instead of replacing Atteric Inc.s stock with Baque Co.s stock, Ana 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, would the portfolios risk increase or decrease?

Ana is an analyst at a wealth management firm. One of her 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 Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Baque Co. (BC) Investment Allocation Beta Standard Deviation 35% 20% 15% 30% 0.600 1.400 1.300 0.300 23.00% 27.00% 30.00% 34.00% Ana calculated the portfolio's beta as 0.775 and the portfolio's expected return as 8.2625%. Ana thinks it will be a good idea to reallocate the funds in her client's portfolio. She recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4.0000%, and the market risk premium is 5.5000%. According to Ana's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 0.664100 0.4505% 0 5775% 0.7161% 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, Ana expects a return of 9.19% 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 Overvalued Undervalued