Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free goverment bonds and a Pisky group 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) 25 50 75 100 Average Annual Return, (Percent) 3.50 7.50 11.50 15.50 19.50 As the risk of Caroline's portfolio increases, the average annual return on her portfolio Suppose Caroline currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average annual return on her portfolio from 7.5% to 15.5%. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and place the proceeds in a savings account Sell some of her bonds and use the proceeds to purchase stocks Accept more risk Osell some of her stocks and use the proceeds to purchase bonds Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 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 Caroline modifies her portfolio to contain 75% diversified stocks and 25% risk-free government bonds; that is, she chooses combination D The average annual retum for this type of portfolio is 15.5%, but given the standard deviation of 15%, the returns will typically (about 95% of the Y to a loss of from a nain of

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8. Risk and return
Suppose Caroline 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
BUDW
C
E
Fraction of Portfolio in Diversified
Stocks
(Percent)
0
25
50
75
100
Average Annual
Return
(Percent)
3.50
7.50
11.50
15.50
19.50
Standard Deviation of Portfolio Return
(Risk)
(Percent)
0
5
10
Sell some of her stocks and place the proceeds in a savings account
O Sell some of her bonds and use the proceeds to purchase stocks
Accept more risk
Sell some of her stocks and use the proceeds to purchase bonds
15
20
As the risk of Caroline's portfolio increases, the average annual return on her portfolio
Suppose Caroline currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she
chooses combination B. She wants to increase the average annual return on her portfolio from 7.5% to 15.5%. In order to do so, she must do which
of the following? Check all that apply.
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 Caroline modifies her portfolio to contain 75% diversified stocks and 25% risk-free government bonds; that is, she chooses combination D
The average annual return for this type of portfolio is 15.5%, but given the standard deviation of 15%, the returns will typically (about 95% of the
time) vary from a gain of
to a loss of
Transcribed Image Text:8. Risk and return Suppose Caroline 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 BUDW C E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.50 7.50 11.50 15.50 19.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 Sell some of her stocks and place the proceeds in a savings account O Sell some of her bonds and use the proceeds to purchase stocks Accept more risk Sell some of her stocks and use the proceeds to purchase bonds 15 20 As the risk of Caroline's portfolio increases, the average annual return on her portfolio Suppose Caroline currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average annual return on her portfolio from 7.5% to 15.5%. In order to do so, she must do which of the following? Check all that apply. 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 Caroline modifies her portfolio to contain 75% diversified stocks and 25% risk-free government bonds; that is, she chooses combination D The average annual return for this type of portfolio is 15.5%, but given the standard deviation of 15%, the returns will typically (about 95% of the time) vary from a gain of to a loss of
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