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Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 24%, and the annual standard deviation is 13%. Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor's 500 Index. The index has an expected return of 20%, and its standard deviation is 18%. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. The Treasury bill yield is 6%. Can he thereby improve his expected rate of return without changing the risk of his portfolio?

Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 24%, and the annual standard deviation is 13%. Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor's 500 Index. The index has an expected return of 20%, and its standard deviation is 18%. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. The Treasury bill yield is 6%. Can he thereby improve his expected rate of return without changing the risk of his portfolio?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 24%, and the annual standard deviation is 13%. Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor's 500 Index. The index has an expected return of 20%, and its standard deviation is 18%. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. The Treasury bill yield is 6%. Can he thereby improve his expected rate of return without changing the risk of his portfolio? Multiple Choice Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%>13% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 24%>13% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%>18% No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%<24% No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%<24%
Transcribed Image Text:Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 24%, and the annual standard deviation is 13%. Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor's 500 Index. The index has an expected return of 20%, and its standard deviation is 18%. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. The Treasury bill yield is 6%. Can he thereby improve his expected rate of return without changing the risk of his portfolio? Multiple Choice Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%>13% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 24%>13% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%>18% No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%<24% No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%<24%
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