Gregory is an analyst at a wealth management firm. One of his clients holds a $5
ID: 2785628 • Letter: G
Question
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% Standard Deviation 53.00% 57.00% 60.00% 64.00% Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Beta 0.600 1.400 1.100 0.500 Gregory calculated the portfolio's beta as 0.805 and the portfolio's expected return as 12.04% 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 0.20 percentage points O 0.26 percentage points O 0.30 percentage points O 0.32 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, Gregory expects a return of 13.28% 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?Explanation / Answer
Old returns
Ratt = 6% + 0.6*7.5% = 10.5%
Rart = 6% + 1.4*7.5% = 16.5%
Rli = 6% + 1.1*7.5% = 14.25%
Rtr = 6% + 0.5*7.5% = 9.75%
New portfolio return
0.2*16.5% + 0.15*14.25% + 0.65*9.75% = 11.775%
change in return = 12.04% - 11.775% = 0.265% = 0.26 percentage points (Option B)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.