The standard deviation of the market idex portfolio is 20%. Stock A has a beta o

Question

The standard deviation of the market idex portfolio is 20%. Stock A has a beta of 1.5 and a residual standard deviation of 30%.

a. What would make for a larger increase in the stock;'s variance; an increase of .15 in its beta or an increase of 3% in its residual standard deviation.

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 changes in (a) will have a greater impact on the portfolio's standard deviation?

Explanation / Answer

A.increase of 3% in its residual standard deviation will make a larger increase in the stock variance
B.an increase of 1.5 in its beta will have greater impact on the portfolio standard deviation

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