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5. Portfolio beta and weights Rajiv 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 Atteric Inc. (AI) Arthur Trust Inc. (AT) Lobster Supply Corp. (LSC) Transfer Fuels Co. (TF) Investment Allocation 35% 20% . 15% 30% Beta 0.600 1.600 1.200 0.400 Standard Deviation 0.23% 0.27% 0.30% 0.34% Rajiv calculated the portfolio's beta as 0.830 and the portfolio's expected return as 10.40%. Rajiv 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 5.00%, and the market risk premium is 6.50%. According to Rajiv's recommendation, assuming that the market is in equilibrium, the portfolio's 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, Rajiv expects a return of 9.96% 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? Undervalued Overvalued Fairly valued Suppose instead of replacing Atterit Inc.'s stock with Transfer Fuels Co.'s stock, Rajiv considers replacing Atterie 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