Suppose you own a portfolio consisting of $250,000 of long-term U.S. government bonds.
1. Would your portfolio be riskless? Explain.
2. Now suppose the portfolio consists of $250,000 of 30-day Treasury bills. Every 30 days your bills mature, and you will reinvest the principal ($250,000) in a new batch of bills. You plan to live on the investment income from your portfolio, and you want to maintain a constant standard of living. Is the T-bill portfolio truly riskless? Explain.
3. What is the least risky security you can think of? Explain.