× Importance of Skill Variety in x Aplia: Student Question ct https://sso.b cole
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× Importance of Skill Variety in x Aplia: Student Question ct https://sso.b colege.com be × servlet/quiz?quiz action takeQuiz&quiz; probGuid-QNAPCOA801010000003e431320090000&ctx; brown1-0012&ck; m Attempts: 2 Do No Harm: 2/3 AaAa 6. Portfolio beta and weights Gregory 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 Allocation 35% 20% 15% 30% Beta 0.900 1.600 1.100 0.400 Standard Deviation 23.00% 27.00% 30.00% 34.00% Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Lobster Supply Corp. (LSC) Transfer Fuels Co. (TF) Gregory calculated the portfolio's beta as 0.920 and the portfolio's expected return as 12.90%. Gregory 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 6%, and the market risk premium is 7.50%. According to Gregory's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? O 1.02 percentage points O 1.62 percentage points 1.31 percentage points O 1.51 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 warys. Suppose, based on the earnings consensus of stock analysts, Gregory expects a return of 10.09% from the portfolio F4 F7 Fa F9 FVOExplanation / Answer
a.
Gregory replace Atteric stock with same amount in additional share in transfer fuel So weight of transfer fuel after replacement become 65%.
So, new beta of portfolio = (20% × 1.60) + (15% 1.10) + (65% × 0.40)
= 0.32 + 0.165 + 0.26
= 0.745
New Beta of portfolio is 0.745.
So, change in expected return because of change in beta is calculated below:
Change in expected return = 7.50% × (0.92 – 0.745)
= 7.50% × 0.175
= 1.31%
Change in expected return is 1.31%.
Option (C) is correct answer.
b.
Required return of new weight portfolio = 12.90% - 1.31%
= 11.59%
Required rate of return of new weight portfolio is 11.59%.
Required rate of return is 11.59% and expected return is 10.09%. Since, expected return is less than required rate of return, so stock is overvalued.
c.
Instead of replacing atteric stock with transfer fuel, the analyst has transferred so some other stock X, whose beta is more than beta of Atteric stock, then beat of portfolio increase. Since, beta is a measure of risk, so risk of portfolio would also increase.
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