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Business, 07.04.2020 19:32 anayajae24

Suppose Caroline 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 Fraction of Portfolio in Diversified Stocks (Percent) Average Annual Return (Percent) Standard Deviation of Portfolio Return (Risk) (Percent)A 0 2.50 0B 25 3.50 5C 50 4.50 10D 75 5.50 15E 100 6.50 20As the risk Caroline's portfolio increases, the average annual return on her portfolio (rises or falls).Suppose Caroline 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 combinations 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? Choose all that applya. Sell some of her stocks and place the proceeds in a savings accountb. Sell some of her stocks and use the proceeds to purchase bondsc. Sell some of her bonds and use the proceeds to purchase stocksd. Accept more riskThe table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, e such as a portfolio's return, stays within two standard deviations of its average approximately 95% of the time. Suppose Caroline 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 ( -15.5% , 0.9% , 14.5% , 24.5% ) to a loss of ( -15.5% , -5.5% , 0.9% , 24.5% ).

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