Suppose Janet modifies her portfolio to contain 50% diversified stocks and 50% risk-free government bonds; that is, she chooses combination C. The average annual return for this type of portfolio is 5.5%, but given the standard deviation of 10%, the returns will typically (about 95% of the time) vary from a gain of to a loss of .

The returns will typically vary from a gain of 25% to a loss of -14.5%

Explanation:

Return variation is given by the formula:

Return variation = Return ± (2*standard Deviation)

Return = 5.5%

Standard Deviation = 10%

Gain = return + (2 * Standard Deviation)

Gain = 5.5% + (2*10%)

Gain = 5.5% + 20%

Gain = 25%

Loss = Return - (2 * Standard Deviation)

Loss = 5.5% - ( 2 * 10%)

Loss = 5.5% - 20%

Loss = - 14.5 %

The returns will typically vary from a gain of 25% to a loss of -14.5%

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