he standard deviation of the market-index portfolio is 15%. Stock A has a beta o
ID: 2619296 • Letter: H
Question
he standard deviation of the market-index portfolio is 15%. Stock A has a beta of 2.00 and a residual standard deviation of 25%.
a. Calculate the total variance for an increase of 0.20 in its beta. (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Total variance %-Squared
b. Calculate the total variance for an increase of 3.53% in its residual standard deviation. (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Total variance %-Squared
Explanation / Answer
Total variance = Systematic variance + Residual variance
Residual variance = ?2Var(rM) + Var(e)
Systematic variance = 2 + 0.2 = 2.2
Total Variance = 2.2 * (0.15)2 + (0.25)2
Total Variance = 0.0495 + 0.0625
Total Variance = 0.112 or 11.2%
b)
Residual standard deviation = 25 + 3.53 = 28.53
Total Variance = 2 * (0.15)2 + (0.2853)2
Total Variance = 0.045 + 0.081396
Total Variance = 0.1264 or 12.64%
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