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): LOADING.... 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

Answer:

the expected returns are missing, so I looked for a similar question:

Treasury bills  4.5%   $80,000

Ford (F) 8.0%   $60,000

Harley Davidson (HOG) 12.0%   $60,000

a) portfolio's expected return = (4.5% x $80,000) + (8% x $60,000) + (12% x $60,000) = $15,600

b) new portfolios expected return = (8% x $100,000) + (12% x $100,000) = $22,000

c) to lower risk. Treasury bills pay a low return but they are risk free investments. While stocks yield a higher return but they also carry a much higher risk.