You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds.Which one of the following must be true if you change the asset allocation?
A) The expected return will remain constant.
B) The revised portfolio will be perfectly negatively correlated with the initial portfolio.
C) The two portfolios could have significantly different standard deviations.
D) The portfolio variance will be unaffected.
E) The portfolio variance will most likely decrease in value.

Question

Quizplus · Accepted Answer

Changing the asset allocation will result in different standard deviations for the portfolios because stocks and bonds have different levels of risk. Therefore, the choice that must be true is C. The expected return may or may not remain constant depending on the specific stocks and bonds in the portfolio, so A cannot be the answer. B is not true because a perfectly negative correlation is unlikely and would result in a more extreme change in the portfolio's risk and return. D and E are not necessarily true because the impact on the portfolio variance depends on how the new allocation affects the correlation and volatility of the assets.

You Currently Have a Portfolio Comprised of 70 Percent Stocks