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Consider a single-index model. The alpha of a stock is 0%. The return on the market index is 12%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 7% and there are no firm-specific events affecting the stock's performance. Find the beta of the stock. List your answer in decimal form rounded to 2 decimal places (i.e. 3.29). The margin for error is 0.03. This text applies to the next 2 questions, i.e., Questions 2 and 3. [Question 5 on page 183 of Bodie, et al. (2022) Essentials of Investments] The standard deviation of the market index portfolio is 20%. Share A has a beta of 1.5 and a residual standard deviation of 30%. Question 2 1 pts What should make for a larger increase in the share's variance: an increase of 0.15 in its beta from 1.5 to 1.65 or an increase of 3% in its residual standard deviation from 30% to 33% ? Both changes would have the same impact on the share's standard deviation (variance). The increase in beta would have a larger impact on the share's standard deviation (variance). The increase in the residual standard deviation would have a larger impact on the share's standard deviation (variance). Question 3 1 pts 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 share A. Which of the changes above (a change beta from 1.5 to 1.65 or a change in the residual standard deviation from 30% to 33% ) would have a greater impact on the portfolio's standard deviation? It is enough to answer this question with good economic intuition, but you can also prove it with math. Just use the fact that: A=M2Cov(rArf,rMrf), when the regression model is (rA,trf)=A+A[rM,trf]+eA,t. The change in beta would have a greater impact on the portfolio's standard deviation. Both changes would have the same impact the portfolio's standard deviation. The change in the residual standard deviation would have a greater impact on the portfolio's standard deviation

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