Brandon 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 would

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Asked Sep 19, 2019
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Brandon 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:
Investment
Standard
Stock
Allocation
Deviation
Beta
Atteric Inc. (AI)
38.00%
35%
0.900
Arthur Trust Inc. (AT)
20%
1.400
42.00%
15%
Li Corp. (LC)
1.200
45.00%
Transfer Fuels Co. (TF)
0.400
30%
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 in
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 4%, and the
market risk premium is 5.50%.
According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio's
required return change?
O 1.10 percentage points
O 0.75 percentage points
O 0.96 percentage points
O 1.19 percentage points
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, Brandon expects a return of 6.46% from the portfolio
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Brandon 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: Investment Standard Stock Allocation Deviation Beta Atteric Inc. (AI) 38.00% 35% 0.900 Arthur Trust Inc. (AT) 20% 1.400 42.00% 15% Li Corp. (LC) 1.200 45.00% Transfer Fuels Co. (TF) 0.400 30% 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 in 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 4%, and the market risk premium is 5.50%. According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? O 1.10 percentage points O 0.75 percentage points O 0.96 percentage points O 1.19 percentage points 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, Brandon expects a return of 6.46% from the portfolio

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According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio's
required return change?
1.10 percentage points
0.75 percentage points
0.96 percentage points
1.19 percentage points
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, Brandon expects a return of 6.46% 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.'s stock with Transfer Fuels Co.'s stock, Brandon 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 portfolio's risk would
help_outline

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According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 1.10 percentage points 0.75 percentage points 0.96 percentage points 1.19 percentage points 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, Brandon expects a return of 6.46% 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.'s stock with Transfer Fuels Co.'s stock, Brandon 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 portfolio's risk would

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Expert Answer

Step 1

Question: 1

Calculation of Portfolio’s Required Return Change:

The Portfolio’s Required Return Change is 0.96%.points.

Excel Spreadsheet:

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В А Investment Allocation Stock Beta 1 2 Atteric Inc 35% 0.9 3 Arthur Trust Inc 20% 1.4 4 Li Corp 5 Transfer Fuels 15% 1.2 30% 0.4 Risk Free Rate Market Risk Premium Decrease in Beta 4% 5.50% 0.175 New Beta 0.72 Required Return Change Expected Return 10 0.96% 11 7.96%

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Step 2

Excel Workings:

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A В 1 Stock Investment Allocation Beta 0.35 3 Arthur Trust Inc |0.2 0.15 5 Transfer Fuels0.3 Risk Free Rate 0.9 1.4 1.2 0.4 0.04 0.055 ЕC2-C5)*B2 |=(B3*C3)+(B4*C4)+((B2+B5)*C5) C8 C7 ЕС6+C9*С7 2 Atteric Inc 4 Li Corp 6 Market Risk Premium 7 Decrease in Beta 8 9 New Beta Required Return Change Expected Return 10 11

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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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