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istory Bookmarks People Window Help e chegg Study l Guided Solutio xe Chegg Study I Gulded Solutio × QNAPCOA801010000003e4 brown 1-0012&ck;=m-1 5 1386864535 1-0A 6. Portfolio beta and weights Brandon is an analyst at a weath 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: Standard Deviation 38.00% 42.00% 45.00% 49.00% Investment AllocationBeta 0.600 1.400 1.200 0.500 Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) LI Corp. (LC) Baque Co. (BC) 35% 20% 15% 30% Brandon alculated the portfolio's beta as 0.820 and the portfolio's expected return as 8.51%. Brandon thinks it will be a good idea to reallocate the funds in his client's partfolio. He recommends replacing Atteric Inc's shares with the same amont i addio al shares of Baque Co. T e risk free rate is 4% and the market risk premium is 5S096. According to Brandon's recommendation, assuming that the market is in equilibrium, how much will the portfolios equired return change? O 0.19 percentage points O 0.15 percentage points 0.24 percentage points 0.22 percentage points Analysts' estimates on expeckd returns from equity investments are based on several factors. These estimations oiso often include subjective and judgmental factors, because different analysts interpret data in difterent ways Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 9.82% from the portfo! with the new weights. Does he think that the revised portfollo, based on the changes he recommended, is undervalued, overvalued, or fairly valued? qbExplanation / Answer
From reallocation of the portfolio the weight of the baque company now comes to 0.65
So the new beta of portfolio= 0.28+0.18+0.325= 0.785
Expected Return now comes to
4 + 5.5*0.785= 8.3175
The expected Return has changed by 0.19
2. Based on stock analyst view the expected Return for new portfolio is 9.82 but when calculated the expected Return comes to 8.3175 so the portfolio is overvalued.
3. If while reallocating the Atteric company shares are replaced with one having higher beta, then it increases the portfolio beta, which means higher risk and higher return.
So the required return would be more than 8.52
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