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8. Risk and return Suppose Juanita is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.00 3.50 5.00 6.50 8.00 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfoli chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard devi 20 If Juanita reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a lower higher lower average annual return. ree bonds; that is, she 4 to a standard deviation of

8. Risk and return Suppose Juanita is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.00 3.50 5.00 6.50 8.00 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfoli chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard devi 20 If Juanita reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a lower higher lower average annual return. ree bonds; that is, she 4 to a standard deviation of

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase bonds Accept a lower average annual rate of return Sell some of her bonds and use the proceeds to purchase stocks Place the entirety of her portfolio in bonds The table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a portfolio's return, stays within two standard deviations of its average approximately 95% of the time. Suppose Juanita modifies her portfolio to contain 25% diversified stocks and 75% risk-free government bonds; that is, she chooses combination B. The average annual return for this type of portfolio is 3.5%, but given the standard deviation of 5%, the returns will typically (about 95% of the time) vary from a gain of to a loss of
Transcribed Image Text:Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase bonds Accept a lower average annual rate of return Sell some of her bonds and use the proceeds to purchase stocks Place the entirety of her portfolio in bonds The table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a portfolio's return, stays within two standard deviations of its average approximately 95% of the time. Suppose Juanita modifies her portfolio to contain 25% diversified stocks and 75% risk-free government bonds; that is, she chooses combination B. The average annual return for this type of portfolio is 3.5%, but given the standard deviation of 5%, the returns will typically (about 95% of the time) vary from a gain of to a loss of
8. Risk and return Suppose Juanita is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B C D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.00 3.50 5.00 6.50 8.00 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 If Juanita reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a lower higher Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfoli chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard devia lower average annual return. free bonds; that is, she to a standard deviation of
Transcribed Image Text:8. Risk and return Suppose Juanita is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B C D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.00 3.50 5.00 6.50 8.00 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 If Juanita reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a lower higher Suppose Juanita currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfoli chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard devia lower average annual return. free bonds; that is, she to a standard deviation of
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