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Suppose Becky is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The
Suppose Becky 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. Combination A B C E Fraction of Portfolio in Diversified Stocks (Percent) D 25 50 75 100 Average Annual Return (Percent) 4.00 7.00 10.00 13.00 16.00 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 Suppose Becky currently allocates 75% of her portfollo 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. Sell some of her stocks and use the proceeds to purchase bonds Place the entirety of her portfolio in 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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