Suppose Maria 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.CombinationABCFraction of Portfolio in DiversifiedStocks(Percent)0255075100Average AnnualReturn(Percent)3.005.508.0010.5013.00As the risk of Maria's portfolio increases, the average annual return on her portfolioSuppose Maria currently allocates 75% of her portfolio to a diversified group of stoc risescombination D. She wants to reduce the level of risk associated with her portfolio freorder to do so, she must do which of the following? Check all that apply.fallsStandard Deviation of Portfolio Return(Risk)(Percent)051015205% of her portfolio to risk-free bonds; that is, she choosesndard deviation of 15 to a standard deviation of 5. In Suppose Maria currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she choosescombination 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. Inorder 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 bondsSell some of her bonds and use the proceeds to purchase stocksPlace the entirety of her portfolio in bondsAccept a lower average annual rate of returnThe 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, stayswithin two standard deviations of its average approximately 95% of the time.Suppose Maria modifies her portfolio to contain 25% diversified stocks and 75% risk-free government bonds; that is, she chooses combination B. Theaverage annual return for this type of portfolio is 5.5%, but given the standard deviation of 5%, the returns will typically (about 95% of the time) varyfrom a gain ofto a loss of

Suppose Maria 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 B с D Fraction of Portfolio in Diversified. Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.00 5.50 8.00 10.50 13.00 As the risk of Maria's portfolio increases, the average annual return on her portfolio Suppose Maria currently allocates 75% of her portfolio to a diversified group of stoc combination D. She wants to reduce the level of risk associated with her portfolio fr order to do so, she must do which of the following? Check all that apply. Standard Deviation of Portfolio Return. (Risk) (Percent) 0 falls 5 10 15 20 rises 5% of her portfolio to risk-free bonds; that is, she chooses Indard deviation of 15 to a standard deviation of 5. In 1

Suppose Maria 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 B с D Fraction of Portfolio in Diversified. Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.00 5.50 8.00 10.50 13.00 As the risk of Maria's portfolio increases, the average annual return on her portfolio Suppose Maria currently allocates 75% of her portfolio to a diversified group of stoc combination D. She wants to reduce the level of risk associated with her portfolio fr order to do so, she must do which of the following? Check all that apply. Standard Deviation of Portfolio Return. (Risk) (Percent) 0 falls 5 10 15 20 rises 5% of her portfolio to risk-free bonds; that is, she chooses Indard deviation of 15 to a standard deviation of 5. In 1

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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If an investor that owns a portfolio with 3 stocks increases their portfolio to 30 stocks, which of the following is MOST LIKELY to happen? Select one: a. risk will increase b. risk would decrease c. Systematic risk would increase d. return would increase
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1. You are trying to plan your investments for the next year. You have decided that the market will either be strong (a bull market), weak (a bear market) or normal. You think that stocks, bonds, and bills will earn the following returns in these scenarios: Scenario Bull market Normal market Bear market Probability 0.20 0.55 0.25 Stock Return 0.25 0.10 -0.15 Bond Return 0.06 0.03 0.02 Bill Return 0.03 0.03 0.03 You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities? (b) What is the volatility of each security return? What is the covariance between stock and bond returns? (d) If you combine stocks and bills as an investment, what is your op- timal combination? What is your expected return? What is your portfolio's volatility? (e) If you combine bonds and bills, what is your optimal combination? What is your expected return? What is your portfolio's volatility? (f) If you combine stocks and bonds, what is your optimal…
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