8. Risk and return Suppose Ana 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. Fraction of Portfolio in Diversified Stocks (Percent) 0 Average Annual Return (Percent) 2.00 Standard Deviation of Portfolio Return (Risk) (Percent) Combination 0 B 25 4.50 5 50 7.00 10 D 75 9.50 15 100 12.00 20 If Ana reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a average annual retum Suppose Ana 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. Accept more risk Sell some of her stocks and use the proceeds to purchase bonds M 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 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 Ana 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 9.5%, 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