How interest rate changes affect present and future value Suppose you deposit $200 today into a bank account with a variable interest rate and will receive a payment in one year. True or False: If during the year the interest rate falls, this increases the future value of your investment.

[True / False]

Combination	Fraction of Portfolio in Diversified Stocks	Average Annual Return	Standard Deviation of Portfolio Return (Risk)
	(Percent)	(Percent)	(Percent)
A	0	2.50	0
B	25	3.50	5
C	50	4.50	10
D	75	5.50	15
E	100	6.50	20

There is a [Positive/ Negaive] relationship between the risk of Eleanor's portfolio and its average annual return.

Suppose Eleanor 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.

Sell some of her stocks and use the proceeds to purchase bonds

Sell some of her stocks and place the proceeds in a savings account

Accept more risk

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 Eleanor 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 [ ].

Suppose a stock analyst recommends buying stock in the following companies:

Company	Industry
Toyonda	Automotive
Saalvo	Automotive
GMW	Automotive
Honsubishi	Automotive
Shexxon	Oil and gas
Mobron	Oil and gas
Airing	Aircraft
Boebus	Aircraft
Goohoo	Technology
Pherk	Pharmaceutical

Each of the following portfolios contains four of the stock picks. Which portfolio is the least diversified?

[ ] Boebus, Airing, Shexxon, Mobron

[ ] Toyonda, Saalvo, GMW, Honsubishi

[ ] Toyonda, Honsubishi, Boebus, Airing

[ ] Pherk, Airing, Goohoo, Shexxon