The standard deviation of the market-index portfolio is 10%. Stock A has a beta of 2.70 and a residual standard deviation of 20%.

a-1.	Calculate the total variance of stock A if its beta is increased by 0.10? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 decimal places.)

Total variance??

a-2.	Calculate the total variance of stock A if its residual standard deviation is increased by 1.33% ? (Do not round intermediate calculations. Enter your answer as a decimal rounded 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 (increase of .10 in beta or increase of 1.33% in residual standard deviation) will have a greater impact on the portfolio's standard deviation?

A

Both will have the same impact.

B

Increase of 1.33% in residual standard deviation will have a greater impact.

C

Increase of .10 in beta will have a greater impact.