how the optimal portfolio choice of some investors will be affected by the higher borrowing rate. Which investors will not be affected by the borrowing rate? II. Portfolio Theory 7. Capital Allocation between the Risky Asset and the Risk−Free Asset The McGraw−Hill Companies, 2001         THE RIGHT MIX: MAKE MONEY BUT SLEEP SOUNDLY       Plunged into doubt? Amid the recent market turmoil, maybe you are won- dering whether you really have the right mix of invest- ments. Here are a few thoughts to keep in mind:   Taking Stock If you are a bond investor who is petrified of stocks, the wild price swings of the past few weeks have proba- bly confirmed all of your worst suspicions. But the truth is, adding stocks to your bond portfolio could bolster your returns, without boosting your portfolios overall gyrations. How can that be? While stocks and bonds often move up and down in tandem, this isnt always the case, and sometimes stocks rise when bonds are tumbling. Indeed, Chicago researchers Ibbotson Associates fig- ure a portfolio thats 100% in longer-term government bonds has the same risk profile as a mix that includes 83% in longer-term government bonds and 17% in the blue-chip stocks that constitute Standard & Poors 500 stock index. The bottom line? Everybody should own some stocks. Even cowards.   Padding the Mattress On the other hand, maybe youre a committed stock mar- ket investor, but you would like to add a calming influ- ence to your portfolio. Whats your best bet? When investors look to mellow their stock portfolios, they usually turn to bonds. Indeed, the traditional bal- anced portfolio, which typically includes 60% stocks and 40% bonds, remains a firm favorite with many invest- ment experts. A balanced portfolio isnt a bad bet. But if you want to calm your stock portfolio, I would skip bonds and in- stead add cash investments such as Treasury bills and money market funds. Ibbotson calculates that, over the past 25 years, a mix of 75% stocks and 25% Treasury bills would have performed about as well as a mix of 60% stocks and 40% longer-term government bonds, and with a similar level of portfolio price gyrations. Moreover, the stock-cash mix offers more certainty, because you know that even if your stocks fall in value, your cash never will. By contrast, both the stocks and bonds in a balanced portfolio can get hammered at the same time.