Question

Suppose Juanita 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.

a. Sell some of her stocks and use the proceeds to purchase bonds
b. Accept a lower average annual rate of return
c. Sell some of her bonds and use the proceeds to purchase stocks
d.Place the entirety of her portfolio in bonds

Answer 1

You didn´t post the complete information of the exercise, I searched the exercise online and tried to ask the most useful question.

Step-by-step explanation:

There is a direct relationship between the risk of Juanita's portfolio and it's average annual return.

Note: Risk and return are directly proportional to each other.

Juanita currently earns a return of 4.5% that is currently she holds portfolio B and she wishes to earn a return of 9.5% that is portfolio D. Then

Sell some of her bonds and use proceeds to buy stocks

Accept more risk.

Suppose, Juanita modifies her portfolio to contain 75% diversified stock and 25% government risk free bond, that is she choose combination D. The average annual return of this type of portfolio is 9.5% but the standard deviation is 15%, the returns will typically (about 95% of the time) vary from a gain of 39.5% to a loss of - 20.5%.

95% confidence = 2 × SD = 2 × 15 = 30

Gain = 9.5 + 30 = 39.5

Loss = 9.5 - 30 = - 20.5