Analysts' estimates on expected returns from equity investments are based on several factors. These estimations also often include subjective andjudgmental factors, because different analysts interpret data in different waysSuppose, based on the earnings consensus of stock analysts, Gregory expects a return of 13.54% from the portfolio with the new weights. Does hethink that the required return as compared to expected returns is undervalued, overvalued, or fairly valued?O UndervaluedOvervaluedO Fairly valuedSuppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory considers replacing Atteric Inc.'s stock with the equal dollar allocationto shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the required return from the portfoliowould increase Gregory is an analyst at a wealth management firm. One of his clients holds a $5,000 portfolio that consists of four stocks. The investment allocationin the portfolio along with the contribution of risk from each stock is given in the following table:StockAtteric Inc. (AI)Arthur Trust Inc. (AT)Lobster Supply Corp. (LSC)Baque Co. (BC)Investment Allocation35%20%O 0.2048 percentage pointsO 0.3255 percentage pointsO 0.2625 percentage pointsO 0.3019 percentage points15%30%Beta Standard Deviation.0.6001.5001.2000.50053.00%57.00%60.00%64.00%Gregory calculated the portfolio's beta as 0.840 and the portfolio's required return as 12.3000%.Gregory 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 sameamount in additional shares of Baque Co. The risk free rate is 6%, and the market risk premium is 7.50%.According to Gregory's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Donot round your intermediate calculations.)

An expected return is the quantum of financial gain or loss an investor expects from their…

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, Gregory expects a return of 13.54% from the portfolio with the new weights. Does he think that the required return as compared to expected returns is undervalued, overvalued, or fairly valued? O Undervalued Overvalued O Fairly valued Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory 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 required return from the portfolio would increase

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, Gregory expects a return of 13.54% from the portfolio with the new weights. Does he think that the required return as compared to expected returns is undervalued, overvalued, or fairly valued? O Undervalued Overvalued O Fairly valued Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory 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 required return from the portfolio would increase

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 5MC: You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the...

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You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Plot the attainable portfolios for a correlation of 0.35. Now plot the attainable portfolios for correlations of +1.0 and −1.0.
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