Question

Suppose Janet 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.

 There is a _______  relationship between the risk of Janet's portfolio and its average annual return.

 Suppose Janet 75% currently allocates of her portfolio to a diversified group of stocks and 25% of her portfolio to 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 

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

• Accept a lower average annual rate of return 

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 Janet 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 _______.

Answer 1

1) There is a direct linear relationship between the risk of Janet's portfolio and its average annual return.

What are the options for this 'fill in the blank' question ?

2) Suppose Janet currently allocates 75% of her portfolio………………..

The following options apply:

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

*Accept a lower average annual rate of return.

3) Suppose Janet modifies her portfolio…………………………….

vary from a gain of 4.5+2*10 = 24.5% to a loss of 4.5-2*10 = -15.5%

Answer 2

There is apositive   relationship between the risk of Rosa's portfolio and its average annual return.