Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 portfolio that consists of four sto

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Rafael Is An Analyst At A Wealth Management Firm One Of His Clients Holds A 10 000 Portfolio That Consists Of Four Sto 1 (97.04 KiB) Viewed 25 times

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 Atteric Inc. (AI) Arthur Trust Inc(AT) Lobster Supply Corp. (LSC) Transfer Fuels Co. (TF) Investment Allocation O 0.98 percentage points O 0.62 percentage points O 0.91 percentage points O 0.79 percentage points 35% 20% 15% 30% Beta 0.600 1.400 O Overvalued 1.200 0.300 O Undervalued O Fairly valued Standard Deviation Rafael calculated the portfolio's beta as 0.760 and the portfolio's expected return as 11.70%. 38.00% 42.00% 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 6%, and the market risk premium is 7.50%. 45.00% 49.00% According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 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 12.41% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued? 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