1.

The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 2.00 and a residual standard deviation of 30%.

a-1.	Calculate the total variance for an increase of 0.10 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 2.62% 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 2.62% in residual standard deviation.
	Increase of .10 in beta.

2.

Consider the following table:

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.05	44%	13%
Mild recession	0.25	16%	11%
Normal growth	0.40	10%	4%
Boom	0.30	30%	3%

b.	Calculate the values of mean return and variance for the stock fund. (Do not round intermediate calculations. Round "Mean return" value to 1 decimal place and "Variance" to 4 decimal places.)

Mean return	%
Variance

c.	Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places.)

Covariance