Fin Investment Class help

BKM_Ess_10e_Ch06_Student2.xlsx

6-5

	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%. a. What would make for a larger increase in the stock’s variance: an increase of .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 index to 90% and to invest 10% in stock A. Which of the changes in (a) will have a greater impact on the portfolio’s standard deviation?
	Market index portfolio standard deviation
	Stock A beta
	Stock A standard deviation
	Change in beta
	Change in standard deviation
Solution
	a.
		Base case variance		0.00%
		Variance from beta change	- 0	0.00%
		Variance from st. dev. Change	0%	0.00%

	Investors expect the market rate of return this year to be 10%. The expected rate of return on a stock with a beta of 1.2 is currently 12%. If the market return this year turns out to be 8%, how would you revise your expectation of the rate of return on the stock?
	Security	Expected return	Beta
	Market index
	Stock A
	Actual market return
Solution
	Unuanticipated change in market		0.0%
	Expected return on stock		0.0%