CONNECT WITH LEARNSMART FOR BODIE: ESSE
CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196239
Author: Bodie
Publisher: MCG
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Chapter 6, Problem 5PS

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%. (LO 6-5)
a. What would make for a larger increase in the stock’s variance: an increase of 0.15 in its beta or an increase of 3% (from 30% to 33%) in its residual standard deviation?
b. An investor who currently holds the market-index portfolio decides to reduce the portfolio allocation to the market mdcx to 90% and to invest 10% in stock A. Which of the changes in (a) will have a greater impact on the portfolios standard deviation?

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