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Homework (Ch 14) Suppose Yvette is choosing how to allocate her portfolio between two asset classes risk-free government bonds and a risky group of diversified
Homework (Ch 14) Suppose Yvette 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 Combination Average Annual Return (Percent) 2.50 3.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 25 4.50 10 D 50 25 100 5.50 15 E 6.50 20 There is a relationship between the risk of Yvette's portfolio and its average annual return Suppose Yvette currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination 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. In order to do so, she must do which of the following? Check all that apply. Place the entirety of her portfolio in bonds Sell some of her stocks and use the proceeds to purchase bonds Accept a lower average annual rate of return Sell some of her bonds and use the proceeds to purchase stocks
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