Problem 6-5

The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.75 and a residual standard deviation of 30%.

a-1.	Calculate the total variance for an increase of 0.25 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 5.71% 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 5.71% in residual standard deviation.
	Increase of .25 in beta.