Question

Penny Francis inherited a​ $200,000 portfolio of investments from her grandparents when she turned 21 years of age. The portfolio is comprised of Treasury bills and stock in Ford​ (F) and Harley Davidson​ (HOG):

	Expected Return		​ $ Value
Treasury bills	4.9​%		72,000
Ford​ (F)	6.2​%		67,000
Harley Davidson​ (HOG)	11.3​%		61,000

a. Based on the current portfolio composition and the expected rates of​ return, what is the expected rate of return for​ Penny's portfolio?

b. If Penny wants to increase her expected portfolio rate of​ return, she can increase the allocated weight of the portfolio she has invested in stock​ (Ford and Harley​ Davidson) and decrease her holdings of Treasury bills. If Penny moves all her money out of Treasury bills and splits it evenly between the two​ stocks, what will be her expected rate of​ return?

c. If Penny does move money out of Treasury bills and into the two​ stocks, she will reap a higher expected portfolio​ return, so why would anyone want to hold Treasury bills in their​ portfolio?

Answer 1

(C) Treasury bill is risk free Investment and other two stocks are risky Investments and we know that when return increases then risk also increases .Therefore when we have Treasury bill in our portfolio then it gives us return which is risk free or we can say that it provides a sort of safety in our portfolio but if we will invest only in risky assets then obviously return will be higher but at the same time ,risk will be higher and it will give us lesser safety as compared to portfolio with Treasury bill.

That's why Treasury bill is included in portfolio for lesser risk or safety in Portfolio.