The standard deviation of the market-index portfolio is 25%. Stock A has a beta of 1.60 and a residual standard deviation of 35%.

a-1.	Calculate the total variance of stock A if its beta is increased by 0.20? (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 5.62% ? (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 .20 in beta or increase of 5.62% in residual standard deviation) will have a greater impact on the portfolio's standard deviation?

Choose the correct answer:

A) Increase of 5.62% in residual standard deviation will have a greater impact. B) Both will have the same impact. C) Increase of .20 in beta will have a greater impact.