iPad 11:12 PM * 88%- ezto.mheducation.com StockTrak is a Stock Game with Online
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iPad 11:12 PM * 88%- ezto.mheducation.com StockTrak is a Stock Game with Online Stock Market.. FINC-662W-IR13-2015W03: Group List Problem Set 3 -Ch 6, 7, 10, 11, &18 Debbie Rosales Investment Theory and Analysis: c chen finc662w ir13 spring2015 INANCE Problem Set 3 -Ch 6,7, 10, 11, &18 instructions help prev 18 (of 20) save & exit value: 5.00 points 3 You did not receive credit for this question in a previous attempt Problem 6-5 The standard deviation of the market-index portfolio is 15%. Stock A has a beta of 2.00 and a residual standard deviation of 25%. a1. Calculate the total variance for an increase of 0.20 in its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Total variance a-2. Calculate the total variance for an increase of 3.53% in its residual standard deviation? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Total variance b. An investor who currently holds the market-index portfolio decides to reduce the portfolio allocation to the market index to 90% and to invest 10% in stock A, which of the following changes will have a greater impact on the portfolio's standard deviation? Increase of 20 in beta. Increase of 3.53% in residual standard deviation.Explanation / Answer
COrrelation = 2*.15/.25 = 1.2
a-1) Variance for increase of .20 in beta:
Revised SD = 2*.15/1.4 = .2143
Revised variance = .2143^2 = .0456 OR 4.59%
a-2) Revised SD = 25% + 3.53% = 28.53%
Revised variance = 28.53%^2 = 8.14%
b) Correct option:
Increase in SD
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