Graded Homework

The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.5 and a residual standard deviation of 30%. (LO6-5)

1. What would make for a larger increase in the stock’s variance: an increase of .15 in its beta or an increase of 3% (from 30% to 33%) in its residual standard deviation?

2. An investor who currently holds the market-index portfolio decides to reduce the port- folio allocation to the market index to 90% and to invest 10% in stock A. Which of the changes in ( a) will have a greater impact on the portfolio’s standard deviation?