8. Risk and return Suppose Cho 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 retum associated with different combinations of stocks and bonds. Fraction of Portfolio In Diversified Stocks (Percent) 0 Average Annual Return (Percent) 2.50 Standard Deviation of Portfolio Return (Risk) (Percent) Combination A 0 B 25 5 3.50 4.50 50 10 D 75 .50 15 E 100 6.50 20 If Cho reduces her portfolio's exposure to risk by opting for a smaller share of stocks, he must also accept a average annual return. Suppose Cho 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 3.5% to 5.5%. In order to do so, she must do which of the following? Check All That annu Homework (Ch 14) X Suppose Cho 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 3.5% to 5.5%. In order to do so, she must do which of the following? Check all that apply. sols A-Z Sell some of her bonds and use the proceeds to purchase stocks Sell some of her stocks and place the proceeds in a savings account Sell some of her stocks and use the proceeds to purchase bonds Accept more risk 6 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 Cho 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 4,5%, but given the standard deviation of 10%, the returns wil typically (about 95% of the time) vary from a gain of to a loss of Grade it Now Save & Continue