Calculate the range of potential annual returns if you invested 10% in bonds and 90% in stocks. How does this range compare with the range of annual returns if you invested 10% in stocks and 90% bonds? What might you say to someone whose reason for investing in 90% bonds and 10% stocks is that they want a 6% return on investment? Use evidence from this graph to explain the value of investing in both stocks and bonds - not just one or the other. Figure 5. The mixture of assets defines the spectrum of returnsBest, worst, and average returns for various stock/bond allocations, 1926-2016Portfolio allocation100%80%10%70%30%90%60%50%40%30%20%0%Bonds0%10%20%40%50%60%70%80%90%100%StocksAnnual returns60%54.2%49.8%5045.4%41.1%4036.7%32.6%31.2%32.3%29.8%28.4%27.9%3020107.2%7.7%8.2%8.7%9.1%9.5%9.9%10.2%Average5.4%6.0%6.6%-10-8.1%-8.2%-10.1%-20-14.2%-18.4%-22.5%-30-26.6%-30.7%-40-34.9%-39.0%-50-43.1%

a) 10% in bonds and 90% in stocks Range of potential return which is evident from the graph given is…

Answered: Figure 5. The mixture of assets defines…

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN:9781285065137

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 22SP

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Calculate the range of potential annual returns if you invested 10% in bonds and 90% in stocks. How does this range compare with the range of annual returns if you invested 10% in stocks and 90% bonds?

What might you say to someone whose reason for investing in 90% bonds and 10% stocks is that they want a 6% return on investment?

Use evidence from this graph to explain the value of investing in both stocks and bonds - not just one or the other.

Figure 5. The mixture of assets defines the spectrum of returns
Best, worst, and average returns for various stock/bond allocations, 1926-2016
Portfolio allocation
100%
80%
10%
70%
30%
90%
60%
50%
40%
30%
20%
0%
Bonds
0%
10%
20%
40%
50%
60%
70%
80%
90%
100%
Stocks
Annual returns
60%
54.2%
49.8%
50
45.4%
41.1%
40
36.7%
32.6%
31.2%
32.3%
29.8%
28.4%
27.9%
30
20
10
7.2%
7.7%
8.2%
8.7%
9.1%
9.5%
9.9%
10.2%
Average
5.4%
6.0%
6.6%
-10
-8.1%
-8.2%
-10.1%
-20
-14.2%
-18.4%
-22.5%
-30
-26.6%
-30.7%
-40
-34.9%
-39.0%
-50
-43.1%

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