Explore BrainMass

Explore BrainMass

    Stock Variance

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com December 24, 2021, 10:39 pm ad1c9bdddf
    https://brainmass.com/business/finance/stock-variance-standard-deviation-497500

    Solution Preview

    Hello

    Kindly find attached tutorial having some ideas, references and content related to the finance problem.

    This response should be useful for you to develop better understanding with regard to the given topics. Kindly use this work for your reference only and please do not use this content in your assignment or homework.

    Calculation of Stock Variance

    Given:
    Standard deviation of market index portfolio: (?m) = 20% or 0.2
    Beta of stock A: (?) = 1.5
    Residual standard deviation of stock A: (?A) = 30% or 0.3
    Stock variance at current value: Market risk + Diversifiable risk
    Or ?12 = ?2× ?m2+ ?A2 (Daves & Daves, 2012)
    = 1.52×0.22+0.32
    = 2.25×0.04 + 0.09
    =0.09+0.09
    =0.18 or 18%

    (A): Change in variance, if residual standard deviation increases by 3%:
    Standard deviation of market index portfolio: (?m) = 20% or 0.2
    Beta of stock A: ...

    Solution Summary

    The expert examines stock variances and standard deviation for market index portfolios.

    $2.49

    ADVERTISEMENT