Risk and return

Suppose Megan 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.

If Megan reduces her portfolio's exposure to risk by opting for a smaller share of stocks, she must also accept a

average annual return.

Suppose Megan 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 $7\mathrm{.}5\%$ to $15\mathrm{.}5\%.$ In order to do so$,$ she must do which

of the following? Check all that apply.

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

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 Megan modifies her portfolio to contain $75\%$ diversified stocks and $25\%$ risk$-$free government bonds; that is$,$ she chooses combination D$.$ The

average annual return for this type of portfolio is $15\mathrm{.}5\%,$ but given the standard deviation of $15\%,$ the returns will typically $($about $95\%$ of the time$)$

vary from a gain of

to a loss of