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What would make for a larger increase in the stock variance

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Reference no: EM133163204

Question - The standard deviation of the market-index portfolio is 15%. Stock A has a beta of 1.6 and a residual standard deviation of 20%.

i. What would make for a larger increase in the stock's variance: an increase of 0.10 in its beta or an increase of 2% in its residual standard deviation?

ii. An investor who currently holds the market-index portfolio decides to reduce the portfolio allocation to the market index to 80% and to invest 20% in stock A. Which of the changes in (i) will have a greater impact on the portfolio's standard deviation?

Reference no: EM133163204

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