WholeLorenzo is an analyst at a wealth management firm. One of his clients holds a $$10,000$ 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:

Lorenzo calculated the portfolio's beta as $0\mathrm{.}840$ and the portfolio's expected return as $12\mathrm{.}30\%.$

Lorenzo thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.$\text{'}$s shares with the same

amount in additional shares of Transfer Fuels Co$.$ The risk$-$free rate is $6\mathrm{.}00\%,$ and the market risk premium is $7\mathrm{.}50\%.$

According to Lorenzo's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change?

$0\mathrm{.}32\%$

$0\mathrm{.}30\%$

$0\mathrm{.}20\%$

$0\mathrm{.}26\%$

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, Lorenzo expects a return of $12\mathrm{.}02\%$ 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?

Fairly valued

Overvalued

Undervalued

Suppose instead of replacing Atteric Inc.$\text{'}$s stock with Transfer Fuels Co$.\text{'}$s stock, Lorenzo considers replacing Atteric Inc.$\text{'}$s stock with the equal dollar

allocation to shares of Company X$\text{'}$s stock that has a higher beta than Atteric Inc.. If everything else remains constant, the portfolio's beta would