Jim is considering changing the asset allocation within his investment portfolio. Currently, the portfolio is allocated to AAA government bonds (25% to Australian government bonds and 25% to German government bonds) and blue chip stocks selected from the ASX top 100 companies.

The returns from the bond investments, especially the German government bonds are very low close to zero.

Jim is seeking higher income opportunities and is considering selling the German government bonds and allocating the proceeds to preferred stocks selected from the ASX top 300 companies. Currently, several preferred stocks (including hybrids) are paying dividends with an equivalent return of about 6%.

Discuss the issues that Jim should take into account before taking a final decision. Your response should consider the changes in the portfolio in terms of risk exposure and return exposure. Your response should also consider the revised portfolio within the context of Jims major assets and overall financial situation.