1) According to Gregory's recommendation, assuming that the market is the equilibrium, how much will the portfolio's required return change?
2) Suppose, based on the earnings consensus of stock analysts, gregory expects a return of 10.09% from the portfolio with the new weights. Does he think that portfolio, based on the changes he recommended, is (undervalued, overvalued, or fairly valued)?
3) Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Gregory considers replacing Atteric Inc.'s stock with the equal sollar allocation to shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the required return from the portfolio would (increase or decrease).
Gregory 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:
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Stock
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Investment Allocation
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Beta
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Standard
Deviation
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Atteric Inc. (AI)
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35%
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0.600
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53.00%
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Arthur Trust Inc. (AT)
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20%
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1.600
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57.00%
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Li Corp. (LC)
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15%
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1.100
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60.00%
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Baque Co. (BC)
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30%
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0.400
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64.00%
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Gregory calculated the portfolio's beta as 0.815 and the portfolio's expected return as 12.11%. 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%