Question

Gregory 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% Standard Deviation Beta 0.600 53.00% Stock Atteric Inc. (AI) Arthur Trust Inc. (AT) Li Corp. (LC) Baque Co. (BC) 20% 1.600 57.00% 1596 1.200 0.500 60.00% 64.00% 30% Gregory calculated the portfolio's beta as 0.860 and the portfolio's expected return as 12.45% 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 Baque 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 0.26 percentage points O 0.20 percentage points O 0.32 percentage points O 0.30 percentage points

Answer 1

Portfolio's required return will change by .26 percentage points. Standard deviation will not be needed. Kindly refer to the image.

Return disterence between BC ond AT (5-.6) x 7.5%2-75% Now, Atteric Inc (AI) is replaced by the sarme shaues d Boque (BC Onount The retun diterence aill be Fnvestnent, Alccation Return dteen c 35) (-75%) 2625 20 percentoge psints (Raurdad .26 percentoge points (In obsaloe tens