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Attempts Keep the Highest / 20 2. Portfolio expected return and risk A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolto, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor's expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only Pour stocks. The stock holdings in his portfolio are shown in the following table: Stock Artemis Inc Babish & Co. Cornell Industries Danforth Motors Percentage of Portfolio 20% 30% 35% 15% Expected Return 6.00% 14.00% 11.00% Standard Deviation 31.00% 35.00% 38.00% 3.00% 40.00% What is the expected return on Andre's stock portfolio 14.55% O 9.70% 7.28% 13.10% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 (P = 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations included in the partially diversified four-stock portfolio is 36%, the portfolia's standard deviation (op) most likely is 36% 4. Portfolio beta and weights Rafael 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: Investment Allocation Beta 0.600 Stock Atterie Inc. (AL) Arthur Trust Inc. (AT) Li Corp. (LC) Boque Co. (C) 35% 2018 1.600 1.300 Standard Deviation 38.00% 42.00% 45.00% 49.00% 15 304 0.400 Rafael calculated the portfolio's beta as 0.845 and the portfolio's required return as 8.6475% 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 1%, and the market risk premium is 5.50%. According to Kately recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? (Note: Do not round your intermediate calculations) O 0.3850 percentage points O 0.4774 percentage points O 0.4428 percentage points O 0.300 percentage points Analysts estimates on expected returns from equity investments are based on several factors. These estimations are often include subjectives judgmental factors, because different analysts interpret data in different ways. Suppose, based on the earnings consensus of stock analysts, Rafaut expects a return of 6.76% from the portfolio with the new weights. Does he think that the required return as compared to expected returns is undervalued, overvalued, or fairly valued? Undervalued Overvalued Fairly valued Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Rafael considers replacing Atterie 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 required return from the portfolio would