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%. (LO 6-5)
A.)What would make for a larger increase in the stock’s variance: an increase of 0.15 in
its beta or an increase of 3% (from 30% to 33%) 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?