Trying to figure out the steps to the follow to answer the following question: 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%. 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 current 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?,Thank you for your help. Upon review of the solution, I have a follow-up question. I'm trying to understand how you came up with the variances under each scenario, such as the 18%, the 19.89%, and the 18.55%. I see that you indicate variance = residual variance + systematic risk, but what numbers were plugged in to get the resulting percentages? I'm kind of a see-spot-run learner. V/r,A,Sorry to keep bugging you on this one, but what formula steps did you use in part (b) to get the 4.5%, 4.627% and 4.505%? I do see that you squared these percentages to get the final results. This will be my last follow-up question on this one, I promise. Thanks!
Paper#1739 | Written in 18-Jul-2015Price : $25