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VOJIHex.htm ISBN 9781305035975&id=5 Assignment 08 - Risk and Rates of Return Back to Assignment Attempts: Keep the Highest: 1/3 6. Portfolio beta and weights Rafael
VOJIHex.htm ISBN 9781305035975&id=5 Assignment 08 - Risk and Rates of Return Back to Assignment Attempts: Keep the Highest: 1/3 6. Portfolio beta and weights Rafael is an analyst at a wealth management firm. One of his clients holds a $5,000 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: Investment Allocation Beta 0.750 Stock Alteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Baque Co. (BC) Standard Deviation 53.0093 57.00% 60.00% 20% 1.600 0.300 Rafael Calculated the portfolio's beta as 0.838 and the portfolio's expected retum as 12.29% Rafael thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atterie Inc. shares with the same amount in additional shares of Baque Co. The risk-free rate is 6%, and the market risk premium is 7.50% According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? O O O O 1.37 percentage points 1.19 percentage points 1.48 percentage points 0.93 percentage points Analysts'estimates on expected returns from equity Investments are based on several factors. These estimations also often indude 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 12.60% 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? Overvalued Undervalued O Fairly valued
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