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The standard deviation of the market-index portfolio is 35%. Stock A has a beta of 1.40 and a residual standard deviation of 45%.
a-1. Calculate the total variance for an increase of 0.20 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 7.54% in its residual standard deviation? (Do not round intermediate calculations. Round your answer to 4 decimal places.)
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 .20 in beta.
Increase of 7.54% in residual standard deviation.
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