Suppose Kate 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 There is a Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.50 5.50 7.50 9.50 11.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 relationship between the risk of Kate's portfolio and its average annual return. Sell some of her stocks and use the proceeds to purchase bonds O Sell some of her stocks and place the proceeds in a savings account 20 Suppose Kate 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 5.5% to 9.5%. In order to do so, she must do which of the following? Check all that apply.
Suppose Kate 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 There is a Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.50 5.50 7.50 9.50 11.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 relationship between the risk of Kate's portfolio and its average annual return. Sell some of her stocks and use the proceeds to purchase bonds O Sell some of her stocks and place the proceeds in a savings account 20 Suppose Kate 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 5.5% to 9.5%. In order to do so, she must do which of the following? Check all that apply.
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
Problem 1PS
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Transcribed Image Text:Suppose Kate 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
There is a
Fraction of Portfolio in Diversified
Stocks
(Percent)
0
25
50
75
100
Average Annual
Return
(Percent)
3.50
5.50
7.50
9.50
11.50
relationship between the risk of Kate's portfolio and its average annual return.
Sell some of her stocks and use the proceeds to purchase bonds
Standard Deviation of Portfolio Return
(Risk)
(Percent)
Sell some of her stocks and place the proceeds in a savings account
ло
Suppose Kate 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 5.5% to 9.5%. In order to do so, she must do which of the
following? Check all that apply.
5
10
15
20
Transcribed Image Text:D
E
There is a
75
100
relationship between the risk of Kate's portfolio and its average annual return.
Sell some of her stocks and use the proceeds to purchase bonds
9.50
Accept more risk
11.50
Suppose Kate 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 5.5% to 9.5%. 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
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 Kate modifies her portfolio to contain 50% diversified stocks and 50% risk-free government bonds; that is, she chooses combination C. The
average annual return for this type of portfolio is 7.5%, but given the standard deviation of 10%, the returns will typically (about 95% of the time)
vary from a gain of
to a loss of
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