Problem: Penny Francis inherited a? $100,000 portfolio of investments from her grandparents when she turned 21 years of age. The portfolio is comprised of the following three? investments:
Expected Return and Value
Treasury Bills 4.8% 50,000
Ford? (F) 6.4% 40,000
Harley Davidson? (HOG) 12.2% 10,000
Q1. Based on the current portfolio composition and the expected rates of? return, what is the expected rate of return for? Penny's portfolio?
Q2. If Penny wants to increase her expected portfolio rate of? return, she could 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?
Q3. 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?