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Portfolio returns composition

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1. (Related to Checkpoint​ 8.1)  ​(Portfolio expected rate of​ return)  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
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 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?

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?

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Solution Summary

The current portfolio composition and the expected rates of returns are determined. The expected rate of return for Penny's portfolio are given.

Solution provided by:
Radhika Lakshmi, MPhil
Education
  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
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