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17 January, 22:44

Suppose Frances 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.

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  1. 17 January, 23:13
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    Answer:A 5% Portfolio Standard deviation will be achieve if Frances invests 25% percents in diversified risky stocks and 75% risk free bonds

    Explanation:

    Portfolio weights = 25% risk free and 75% diversified risky stocks

    Portfolio standard deviation = 15%

    Portfolio Standard Deviation = weight of risky stocks x Total standard deviation

    15% = 0.75 x total standard deviation

    total standard deviation = 15%/0.75 = 20%

    5% = Portfolio weight x 20%

    total standard deviation = 5%/20% = 0.25 = 25%

    A 5% Portfolio Standard deviation will be achieve if Frances invests 25% percents in diversified risky stocks and 75% risk free bonds
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