(Related to Checkpoint 8.1) (Computing the portfolio expected rate of return) 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): 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? Data table - Expected Return $ Value Treasury bills 4.4% 70,000 Ford (F) 8.2% 52,000 Harley Davidson (HOG) 13.7% 78,000

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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unit 8-2

(Related to Checkpoint 8.1) (Computing the portfolio expected rate of return) 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):
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?
Data table
-
Expected
Return
$ Value
Treasury bills
4.4%
70,000
Ford (F)
8.2%
52,000
Harley Davidson (HOG)
13.7%
78,000
Transcribed Image Text:(Related to Checkpoint 8.1) (Computing the portfolio expected rate of return) 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): 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? Data table - Expected Return $ Value Treasury bills 4.4% 70,000 Ford (F) 8.2% 52,000 Harley Davidson (HOG) 13.7% 78,000
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