Question

Rafael 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% Beta 0.750 Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Lobster Supply Corp. (LSC) Baque Co. (BC) Standard Deviation 38.00% 42.00% 45.00% 49.00% 20% 15% 30% 1.400 1.200 0.500 Rafael calculated the portfolio's beta as 0.873 and the portfolio's expected return as 12.55%. 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 Baque Co. The risk-free rate is 6%, and the market risk premium is 7.50%. According to Rafael's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? O O O O 0.66 percentage points 0.82 percentage points 0.52 percentage points 0.76 percentage points Suppose instead of replacing Atteric Inc.'s stock with Baque 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 , and the required return from the portfolio would

Answer 1

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IF BETA INCREASES, THEN REQUIRED RETURN ALSO INCREASES

ke - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Dr General Wrap Text Merge Merge & Center - Center SF $ % % , 4:0 .00 :.: Insert Delete Format File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste Format Painter BIU - D A Clipboard Font 2126 - Fax Y Y Z AA Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Alignment Number Cells AB AE AF AG 115 116 BETA WEIGHTED BETA 117 ALLOCATION 20% 15% 65% ARTHUR TRUST LOBSTER BAQUE 118 1.4 1.2 0.5 0.28 0.18 0.325 0.785 PORTFOLIO BETA 119 120 121 122 REQUIRED RETURN ON NEW PORTFOLIO = Rf + beta(Rm-Rf) REQUIRED RETURN ON NEW PORTFOLIO = 6% +0.785*(7.5%) = 123 11.89% CHANGE IN REQUIRED RETURN = 12.55% - 11.89% = 0.66% 124 125 126 127 128 129 130 131 IF STOCK HAS HIGHER BETA THAN ATTRIC INC THEN PORTFOLIO BETA WILL INCREASE AND SO RETURN FROM PORTFOLIO WILL INCREASE K 132 M Rea convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: AG470 YIELD bond portfolio cap stru WACC BO 130% O * 10 RESI el - S E ENG 22-11-2019