Question

Suppose Amy currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average annual return on her portfolio from 2.5% to 4.5%. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase bonds Accept more risk Sell some of her stocks and place the proceeds in a savings account Sell some of her bonds and use the proceeds to purchase stocks

Answer 1

Answer:

Accept more risk.  

Sell some of her bonds and use the proceeds to purchase stocks .

Explanation:

Typically, the rate of returns associated with stock is higher than the rates of return associated with bonds. This is because a higher risk is associated with stocks, while it is safer to hold bond because bond guarantee payment while stock does not as it fluctuates in value.

Therefore, the intention of Amy to increase the average annual return on her portfolio from 2.5% to 4.5% implies she has to sell some of her bonds which currently has a share of 75% and use the proceeds to purchase stocks which promises a higher rate of return. But at the same time, Amy has to accept more risk associated with stocks.