Question

In general, the ________ the proportion of your portfolio that is allocated to bonds, the ________ will be your portfolio's overall risk.

A) larger; lower
B) smaller; lower
C) larger; higher
D) None of the above

Answer 1

The larger the proportion of your portfolio allocated to bonds, the lower will be your portfolio's overall risk.

Step-by-step explanation:

The correct answer is A) larger; lower.

When a larger proportion of your portfolio is allocated to bonds, your portfolio's overall risk is lower. This is because bonds are generally considered to be less risky than stocks. While stocks have the potential for higher returns, they also come with higher volatility and the risk of losing value. Bonds, on the other hand, offer a more stable and predictable return.

For example, if you have 80% of your portfolio allocated to bonds and 20% allocated to stocks, your overall risk will be lower compared to a portfolio with 80% allocated to stocks and 20% allocated to bonds. The higher allocation to bonds provides a cushion against the potential volatility of stocks, reducing the overall risk of the portfolio.