Suppose Neha 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 D E There is a Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 4.50 6.50 8.50 Accept lower average annual rate of return relationship between the risk of Neha's portfolio and its average annual return. 10.50 Suppose Neha currently allocates 75% of her portfolio 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 bonds and use the proceeds to purchase stocks Sell some of her stocks and use the proceeds to purchase bonds Place the entirety of her portfolio in bonds Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15. 20
Suppose Neha 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 D E There is a Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 4.50 6.50 8.50 Accept lower average annual rate of return relationship between the risk of Neha's portfolio and its average annual return. 10.50 Suppose Neha currently allocates 75% of her portfolio 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 bonds and use the proceeds to purchase stocks Sell some of her stocks and use the proceeds to purchase bonds Place the entirety of her portfolio in bonds Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15. 20
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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Step 1: How do you compute portfolio returns.
VIEWStep 2: a) Compute the range of returns at a 95% confidence interval.
VIEWStep 3: b) explain the relationship between Neha's Portfolio risk and returns.
VIEWStep 4: c) What should Neha do to reduce her portfolio standard deviation from 15 to 5.
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