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8. Risk and return Suppose Janet is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of

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8. Risk and return Suppose Janet 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) Average Annual Return (Percent) Standard Deviation of Portfolio Return (Risk) (Percent) Combination If Janet reduces her portfolio's exposure to risk by opting for a smaller share must also accept a Ngher average annual return. Suppose Janet currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio combination B. She wants to increase the average annual return on her portfolio from 3.5% to 5.5%. In order tower following? Check all that apply. free bonds; that is, she chooses she must do which of the Accept more risk 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 Sell some of her stocks and use the proceeds to purchase bonds 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 e Suppose Janet currently allocates 25% of her purLIONIO combination B. She wants to increase the average annual return on her portfolio from 3.5% to 5.5%. In d following? Check all that apply. Accept more risk 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 Sell some of her stocks and use the proceeds to purchase bonds 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 Janet 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 will typically (about 95% of the time) vary from a gain of to a loss of Grade It Now Save & Continue Continue without saving

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