Chapter2: The Domestic And International Financial Marketplace
Section: Chapter Questions
Problem 1P
Related questions
Question
Portfolio beta and weights
Rafael 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:
Stock
|
Investment Allocation
|
Beta
|
Standard Deviation
|
---|---|---|---|
Atteric Inc. ( |
35% | 0.900 | 23.00% |
Arthur Trust Inc. (AT) | 20% | 1.400 | 27.00% |
Li Corp. (LC) | 15% | 1.100 | 30.00% |
Transfer Fuels Co. (TF) | 30% | 0.300 | 34.00% |
Rafael calculated the portfolio’s beta as 0.850 and the portfolio’s required return as 8.6750%.
Rafael 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 Rafael’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.)
0.9009 percentage points
1.3283 percentage points
1.1550 percentage points
1.4322 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, Rafael expects a return of 6.02% 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?
Fairly valued
Overvalued
Undervalued
Suppose instead of replacing Atteric Inc.’s stock with Transfer Fuels Co.’s stock, Rafael 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 beta would -----
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning