Purchase Solution

Stock Variance

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution
Solution Summary

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

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: ...

Purchase this Solution
Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

View More Free Quizzes
Related BrainMass Solutions

  • Calculating the Variance and Standard Deviation

    78425 Calculating the Variance and Standard Deviation Question: A portfolio is made up of 75% of stock 1, and 25% of stock 2. Stock 1 has a variance of .08, and stock 2 has a variance of .035. The covariance between the stocks is -.001.

  • Portfolio of Common Stock

    Variance of the portfolio of stock 1 and 2 = [(Proportion of stock 1)^2] * (Variance of stock 1) + [(Proportion of stock 2)^2] * (Variance of stock 2) + 2 * (Proportion of stock 1) * (Proportion of stock 2) * (Covariance of stock 1 and 2) ?

  • Calculating the mean and variance for different portfolios.

    a) $4 million invested in Stock 2 b) $2 million each in Stock 2 and Stock 4 c) $2 million each in Stock 3 and Stock 4 d) $1 million in each stock And calculate the mean and variance of each of the four portfolios a, b, c, and d.

  • Calculating variance of portfolio returns

    387208 Variance of Portfolio Returns Hyacinth Macaw invests 60% of her funds in stock I and the balance in stock J. The standard deviation of returns on I is 10%, and on J it is 20%. Calculate the variance of portfolio returns, assuming a.

  • Expected Return and Standard Deviation

    To calculate the standard deviation, we first calculate the variance Variance = Sum ( Expected Return - Stock Return)^2 X probability Variance = (10.57%-(-4.5%))^2X0.1 + (10.57%-4.4%)^2 X 0.2 + (10.57%-12%)^2X0.5 + (10.57%-20.7%)^2 X 0.2 Variance =

  • Optimal weights to stocks - Portfolio variance minimization

    Hi, Please see response to your posting as given below. *************************************************************************************** Let v1 be the variance of stock 1 and v2 be the variance of stock 2.

  • Expected return and standard deviation of stocks

    State Occurs Variance Recession 0.15 0.04 0.0002646 Normal 0.75 0.08 0.0000030 Boom 0.1 0.16 0.0006084 Total 0.0008760 Variance= 0.0008760 Standard deviation =square root of variance= 0.029597297 2.96% Stock Q

  • Computation of Return, Variance and Beta

    Find the expected return on Stock 1,and Stock 2. b. Find the variance of return on Stock 1, and Stock 2 c. Consider a portfolio that is invested 30 percent in Stock 1, 70 percent in Stock 2. Find the expected return on this portfolio. d.

  • Stocks' Beta

    Stock C 0.0013 0.2031 =0.0013/0.0064 Answer: beta i Stock A 1.0938 Stock B 0.7031 Stock C 0.2031 The solution calculates Stocks' Beta using expected return and variance of each stock and also covariance of each stock

View More Related Solutions