10. Portfolio beta and weights
Brandon 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:
Stock |
Investment Allocation |
Beta |
Standard Deviation |
---|---|---|---|
Atteric Inc. (AI) | 35% | 0.750 | 23.00% |
Arthur Trust Inc. (AT) | 20% | 1.500 | 27.00% |
Li Corp. (LC) | 15% | 1.100 | 30.00% |
Transfer Fuels Co. (TF) | 30% | 0.500 | 34.00% |
Brandon calculated the portfolio’s beta as 0.8775 and the portfolio’s expected return as 8.83%.
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%.
1) According to Brandon’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? (Note: Round your intermediate calculations to two decimal places.)
A) 0.60 percentage points
B) 0.55 percentage points
C) 0.37 percentage points
D) 0.48 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.
2) Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 6.85% 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?
A) Fairly valued
B) Overvalued
C) Undervalued
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 beta would (decrease OR increase?) , and the required return from the portfolio would (decrease OR increase?)
1.
Option D 0.48 percentage points
=35%*(0.5-0.75)*5.5%
=-0.4813%
2.
Option B Overvalued
=8.83%+35%*(0.5-0.75)*5.5%
=8.3488%
3.
Increase
4.
Increase
10. Portfolio beta and weights Brandon is an analyst at a wealth management firm. One of...
9. Portfolio beta and weights Brandon 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: Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Transfer Fuels Co. (TF) Investment Allocation 35% 20% 15% 30% Beta 0.750 1.500 1.100 0.500 Standard Deviation 53.00% 57.00% 60.00% 64.00%...
Brandon 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 Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.750 53.00% Arthur Trust Inc. (AT) 20% 1.500 57.00% Li Corp. (LC) 15% 1.100 60.00% Transfer Fuels Co. (TF) 30% 0.500 64.00% Brandon calculated the portfolio’s beta...
Brandon 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: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.750 23.00% Arthur Trust Inc. (AT) 20% 1.600 27.00% Li Corp. (LC) 15% 1.100 30.00% Transfer Fuels Co. (TF) 30% 0.300 34.00% Brandon calculated the portfolio’s beta...
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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: Standard Deviation Investment Allocation 35% 53.00% Stock Atteric Inc. (AI) Arthur Trust Inc.(AT) Lobster Supply Corp. (LSC) Transfer Fuels Co. (TF) 20% Beta 0.750 1.400 1.300 0.500 57.00% 15% 60.00% 30% 64.00% Brandon calculated the portfolio's beta...
Brandon 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 Standard Deviation Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Beta 0.750 35% 53.00% 20% 1.500 57.00% 1.100 60.00% Li Corp. (LC) Transfer Fuels Co. (TF) 15% 30% 0.500 64.00% Brandon calculated the portfolio's beta...
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Any help would be appreciated - thanks! 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: Investment Standard Stock Allocation Beta Deviation Atteric Inc. (AI) 35% 0.600 23.00% Arthur Trust Inc. (AT) 20% 1.500 27.00% Li Corp. (LC) 1.100 15% 30.00% Transfer Fuels Co.(TF) 30% 0.500...
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increase/decrease 12. Portfolio beta and weights Eric 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 Standard Deviation Stock Atteric Inc. (AI) Beta 0.750 35% 0.53% 20% 1.500 0.57% Arthur Trust Inc(AT) 0.60% Lobster Supply Corp. (LSC) Transfer Fuels Co. (TF) 15% 30% 1.100 0.500...