Thanks for your help. Rafael 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: Investment Standard Stock Allocation Beta Deviation Atteric Inc. (AI) 35% 0.900 38.00% Arthur Trust Inc. (AT) 20% 1.400 42.00% Li Corp. (LC) 15% 1.100 45.00% Transfer Fuels Co. (TF) 30% 0.300 49.00%

Rafael calculated the portfolio's beta as 0.850 and the portfolio's expected return as 8.68%. Rafael 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%, and the market risk premium is 5.50%.

According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? Q 1.44 percentage points

o 1.16 percentage points

o 0.91 percentage points 1.33 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 6.02% 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? o Overvalued

o Undervalued

o 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. If everything else remains constant, the portfolio's beta would __________, and the required return from the portfolio would ______________.