Brandon 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: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.900 38.00% Arthur Trust Inc. (AT) 20% 1.500 42.00% Li Corp. (LC) 15% 1.300 45.00% Transfer Fuels Co. (TF) 30% 0.400 49.00% Brandon calculated the portfolio’s beta as 0.930 and the portfolio’s required return as 9.1150%. 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.) 1.1069 percentage points 0.9625 percentage points 1.1935 percentage points 0.7508 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 9.65% 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 Fairly valued Overvalued Suppose instead of replacing Atteric Inc.’s stock with Transfer Fuels Co.’s stock, Brandon 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 risk would .
Brandon 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: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.900 38.00% Arthur Trust Inc. (AT) 20% 1.500 42.00% Li Corp. (LC) 15% 1.300 45.00% Transfer Fuels Co. (TF) 30% 0.400 49.00% Brandon calculated the portfolio’s beta as 0.930 and the portfolio’s required return as 9.1150%. 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.) 1.1069 percentage points 0.9625 percentage points 1.1935 percentage points 0.7508 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 9.65% 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 Fairly valued Overvalued Suppose instead of replacing Atteric Inc.’s stock with Transfer Fuels Co.’s stock, Brandon 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 risk would .
Chapter14: Investing In Stocks And Bonds
Section: Chapter Questions
Problem 7LTAI
Related questions
Question
Brandon 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:
|
Stock
|
Investment Allocation
|
Beta
|
Standard Deviation
|
|---|---|---|---|
| Atteric Inc. ( |
35% | 0.900 | 38.00% |
| Arthur Trust Inc. (AT) | 20% | 1.500 | 42.00% |
| Li Corp. (LC) | 15% | 1.300 | 45.00% |
| Transfer Fuels Co. (TF) | 30% | 0.400 | 49.00% |
Brandon calculated the portfolio’s beta as 0.930 and the portfolio’s required return as 9.1150%.
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.)
1.1069 percentage points
0.9625 percentage points
1.1935 percentage points
0.7508 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 9.65% 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
Fairly valued
Overvalued
Suppose instead of replacing Atteric Inc.’s stock with Transfer Fuels Co.’s stock, Brandon 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 risk would .
AI-Generated Solution
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
Recommended textbooks for you