The standard deviation of the market-index portfolio is 10%. Stock A has a beta
ID: 2616050 • Letter: T
Question
The standard deviation of the market-index portfolio is 10%. Stock A has a beta of 2.50 and a residual standard deviation of 20%. a. Calculate the total variance for an increase of 0.10 in its beta. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Total variance b. Calculate he otal variance or an increase o 24% n s residual standard de ation. Do not round intermediate calculations. Round ouran erto the near es whole number. Total variance %-Squared %-SquaredExplanation / Answer
Total Variance = Systematic Variance + residual variance
Total Variance = B2 Var(Rm) + Var(e)
Total Variance = 2.502 * (0.10)2 + 0.202
Total Variance = 0.1025
a)
If Beta increased by 0.10, then B = 2.50+0.10 =2.60
Total Variance = B2 Var(Rm) + Var(e)
Total Variance = 2.602 * (0.10)2 + 0.202
Total Variance = 0.1076
Total Variance = 10.76% or 11%
b)
If Residual SD increased by 1.24, then SD(e) = 20% + 1.24% = 21.24%
Total Variance = B2 Var(Rm) + Var(e)
Total Variance = 2.602 * (0.10)2 + 0.21242
Total Variance = 0.1076
Total Variance = 10.76% or 11%