Risk and Return Graded Assignment | Read Chapter 6 | Back to Assignment Due Wedn

Question

Risk and Return Graded Assignment | Read Chapter 6 | Back to Assignment Due Wednosday 06.2748 at 114 Attempts Do No Harm: 14 11. Portfolio beta and weights Aa Aa 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 allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Investment Allocation 35% 20% 15% 30% Beta 0.600 1.400 1 100 0.300 Standard Deviation 38.00% 42.00% 45,00% 49.00% Stock Atteric InC (AI) Arthur Trust Inc. (AT) Lobster Supply Corp. (LSC) Baque Co. (BC) Gregor ulated the portfolio's beta as 0.745 and the portfolio's expected return as 8.10% Gregory thinks it will be a good ides to reallocate the funds in his client's portrollo, He recommends roplacing Atteric Inci's s res with tne same amount in additional shares of Baque Co. The risk-free rate is 4%, and the market no prem 5.50%

Explanation / Answer

Investment allocation Beta Allocated Beta Standard Deviation Atteric INC (AI) 35% 0.600 0.210 38% Arthur Trust Inc(AT) 20% 1.400 0.280 42% Lobster Supply Corp(LSC) 15% 1.100 0.165 45% Baque Co(BC) 30% 0.300 0.090 49% Total 0.745 Revised scenario Investment allocation Beta Allocated Beta Standard Deviation Arthur Trust Inc(AT) 20% 1.400 0.280 42% Lobster Supply Corp(LSC) 15% 1.100 0.165 45% Baque Co(BC) 65% 0.300 0.195 49% Total 0.640 Using the CAPM Ke = 4% + 0.64 x 5.5% = 7.52% Change in required return of portfolio: 0.58% Option C is right =8.1% -7.52% OverValued

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