Brandon is an analyst at a wealth management firm. One of his clients holds in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation 35% 20% 15% 30% Beta 0.750 1.600 1.100 0.300 O 0.6778 percentage points O 0.8690 percentage points O 0.9994 percentage points O 1.0776 percentage points Standard Deviation 38.00% 42.00% 45.00% 49.00% Brandon calculated the portfolio's beta as 0.838 and the portfolio's required return as 8.6090%. Brandon 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 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? (Note: Do not round your intermediate calculations.) 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.
Brandon is an analyst at a wealth management firm. One of his clients holds in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation 35% 20% 15% 30% Beta 0.750 1.600 1.100 0.300 O 0.6778 percentage points O 0.8690 percentage points O 0.9994 percentage points O 1.0776 percentage points Standard Deviation 38.00% 42.00% 45.00% 49.00% Brandon calculated the portfolio's beta as 0.838 and the portfolio's required return as 8.6090%. Brandon 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 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? (Note: Do not round your intermediate calculations.) 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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:
Stock
Atteric Inc. (AI)
Arthur Trust Inc. (AT)
Li Corp. (LC)
Transfer Fuels Co. (TF)
Investment Allocation
O 0.6778 percentage points
35%
20%
15%
30%
0.8690 percentage points
Beta
0.750
1.600
1.100
0.300
Brandon calculated the portfolio's beta as 0.838 and the portfolio's required return as 8.6090%.
Brandon 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 same
amount in additional shares of Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%.
O 0.9994 percentage points
O 1.0776 percentage points
Standard Deviation
According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Do
not round your intermediate calculations.)
38.00%
42.00%
45.00%
49.00%
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.
Transcribed Image Text:According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Do
not round your intermediate calculations.)
O 0.6778 percentage points
O 0.8690 percentage points
O 0.9994 percentage points
O 1.0776 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 6.24% 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?
Undervalued
O Fairly valued
O Overvalued
decrease
increase
tead of replacing Atteric Inc.'s stock with Transfer Fuels Co.'s stock, Brandon considers replacing Atteric Inc.'s stock with the equal dollar
shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolio's beta would
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