Problem: The standard deviation of the market index portfolio is 20%. Stock A has a beta 1.5 and residual standard deviation of 30%.
A) What would make for a larger increase in the stock variance, an increase of 1.5 in its beta or an increase of 3% in its residual standard deviation?
B) An inventor 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 greater impact on the portfolio standard deviation?