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FinanceQ&A LibraryBrandon is an analyst at a wealth management firm. One of his clients holds a $7,500 portfolio that consists of fourstocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in thefollowing table:InvestmentStandardStockAllocationDeviationBetaAtteric Inc. (AI)38.00%35%0.900Arthur Trust Inc. (AT)20%1.40042.00%15%Li Corp. (LC)1.20045.00%Transfer Fuels Co. (TF)0.40030%49.00%Brandon calculated the portfolio's beta as 0.895 and the portfolio's expected return as 8.92%Brandon thinks it will be a good idea to reallocate the funds inclient's portfolio. He recommends replacing AttericInc.'s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4%, and themarket risk premium is 5.50%.According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio'srequired return change?O 1.10 percentage pointsO 0.75 percentage pointsO 0.96 percentage pointsO 1.19 percentage pointsAnalysts' estimates on expected returns from equity investments are based on several factors. These estimationsalso often include subjective and judgmental factors, because different analysts interpret data in different ways.Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 6.46% from the portfolio According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio'srequired return change?1.10 percentage points0.75 percentage points0.96 percentage points1.19 percentage pointsAnalysts' estimates on expected returns from equity investments are based on several factors. These estimationsalso often include subjective and judgmental factors, because different analysts interpret data in different ways.Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 6.46% from the portfoliowith the new weights. Does he think that the revised portfolio, based on the changes he recommended, isundervalued, overvalued, or fairly valued?Fairly valuedOvervaluedUndervaluedSuppose instead of replacing Atteric Inc.'s stock with Transfer Fuels Co.'s stock, Brandon considers replacing AttericInc.'s stock with the equal dollar allocation to shares of Company X's stock that has a higher beta than Atteric Inc. Ifeverything else remains constant, the portfolio's risk wouldQuestion

Asked Sep 19, 2019

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Step 1

**Question: 1**

**Calculation of Portfolio’s Required Return Change:**

The Portfolio’s Required Return Change is __0.96%.points__.

**Excel Spreadsheet:**

Step 2

**Excel Workings:**

Step 3

**Question: 2**

The revised portfolio is **Overvalued.**

Because the new expected return of 7.96% is higher than the expected return of 6.46%...

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