Suppose latisha 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 fraction of portfolio ave. annual return standard deviation
a 0 2.00 0
b 25 4.50 5
c 50 7.00 10
d 75 9.50 15
e 100 12.00 20
if latisha reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a average annual return.
suppose latisha 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 4.5% to 9.5%. in order to do so, she must do which of the following? check all that apply.
(a) sell some of her stocks and place the proceeds in a savings account
(b) sell some of her bonds and use the proceeds to purchase stocks
(c) sell some of her stocks and use the proceeds to purchase bonds
(d) accept more risk the table uses the standard deviation of the portfolio's return as a measure of risk.
(e) a normal random variable, such as a portfolio's return, stays within two standard deviations of its average approximately 95% of the time.