Question

Please assist with a-c. thank you

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 or 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? a. Based on the current portfo o composition and the g en expected rates of return, the expected rate of return for Penny's portfolio s %. Round to cma places. oa

Answer 1

You have not given the expected return in each type of investment and quatum of investment
Following are the expected return & quantum of the investment
	Expected Return	Value
Treasury Bill	3.10%	80,000
Ford	7.20%	54,000
HOG	13.90%	66,000
		200,000
a.
To calculate expected return of the portfolio, we have to find out weight each type of investment and multiply it with the expected return and adding up all will give expected return of the portfolio
	Expected Return	Value	Weight of investment	Expected return * Weight
Treasury Bill	3.10%	80,000	0.40	1.24%
Ford	7.20%	54,000	0.27	1.94%
HOG	13.90%	66,000	0.33	4.59%
		200,000		7.77%
Expected return of the portfolio is 7.77%
b. If Penny distribute the money invested in Treasury bill inot Ford & HOG
	Expected Return	Value	Distribution	Value after distribution	Weight of investment	Expected return * Weight
Treasury Bill	3.10%	80,000	-80,000	-	0.00	0.00%
Ford	7.20%	54,000	40,000	94,000	0.47	3.38%
HOG	13.90%	66,000	40,000	106,000	0.53	7.37%
		200,000	-	200,000		10.75%
Expected return of the portfolio after rearrangement is 10.75%
c Reason of keeping the money into treasury bill
Treasury bills are issued by treasury department of govt of US. Treasury bill are assumed to be more secure rather extremly secure than investment in equities, there is faith among people due to credit of US govt that investment in treasury bill is secure whereas investment in the equity even it is a bluechip company can't be said that much secure as treasury bill, so inspite of the lower return people will go with treasury bills.