The possibility of the portfolio being riskless. Portfolio: The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

Question

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Answer 1

Question

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Conclusion

Thus, it is not possible for a portfolio to be riskless.

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Conclusion

The treasury bills portfolio can also be not truly riskless.

c.

Summary Introduction

To explain: The possible least risky security.

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

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Students have asked these similar questions

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

Suppose you have $375,000 in cash, and you decide to borrow another $63,750 at a 7% interest rate to invest in the stock market. You invest the entire $438,750 in a portfolio J with a 20% expected return and a 28% volatility. a. What is the expected return and volatility (standard deviation) of your investment? b. What is your realized return if J goes up 39% over the year? c. What return do you realize if J falls by 19% over the year?

Suppose you have $100,000 in cash, and you decide to borrow another $25,000 at a 6% interest rate to invest in the stock market. You invest the entire $125,000 in a portfolio J with a 24% expected return and a 26% volatility. What is the expected return and volatility (standard deviation) of your investment? What is your realized return if J goes up 13% over the year? What return do you realize if J falls by 26% over the year?

Answer 2

Question

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Conclusion

Thus, it is not possible for a portfolio to be riskless.

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Conclusion

The treasury bills portfolio can also be not truly riskless.

c.

Summary Introduction

To explain: The possible least risky security.

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

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Answer 3

Question

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Conclusion

Thus, it is not possible for a portfolio to be riskless.

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Conclusion

The treasury bills portfolio can also be not truly riskless.

c.

Summary Introduction

To explain: The possible least risky security.

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Conclusion

Thus, it is not possible for a portfolio to be riskless.

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Conclusion

The treasury bills portfolio can also be not truly riskless.

c.

Summary Introduction

To explain: The possible least risky security.

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Conclusion

Thus, it is not possible for a portfolio to be riskless.

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Conclusion

The treasury bills portfolio can also be not truly riskless.

c.

Summary Introduction

To explain: The possible least risky security.

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

Answer 6

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Conclusion

Thus, it is not possible for a portfolio to be riskless.

Answer 7

Chapter 8, Problem 1Q

a.

Summary Introduction

To explain: The possibility of the portfolio being riskless.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.

Answer 8

a.

Expert Solution

Answer to Problem 1Q

The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
This is so because a portfolio contains some risk in context with the interest rate.
The interest rate goes up and down in the market and this condition will affect the value of the bonds. So, it is not possible for the portfolio to be riskless.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
Any kind of investment contains some risk.
The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
Hence, the idea of having a riskless portfolio does not work.

Answer 13

Conclusion

Thus, it is not possible for a portfolio to be riskless.

Answer 14

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Conclusion

The treasury bills portfolio can also be not truly riskless.

Answer 15

b.

Summary Introduction

To explain: The possibility of Treasury bill portfolio being riskless.

Answer 16

b.

Expert Solution

Answer to Problem 1Q

In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
The inflation rate is higher than the interest rate. In this case, the investor will get the purchasing power and by the result of which his standard of living can decline.
However, they contain less risk as treasury bills are backed by the U.S. government.

Answer 17

b.

Expert Solution

Answer 18

b.

Expert Solution

Answer 19

Expert Solution

Answer 20

Explanation of Solution

The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.

Answer 21

Conclusion

The treasury bills portfolio can also be not truly riskless.

Answer 22

c.

Summary Introduction

To explain: The possible least risky security.

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

Answer 23

c.

Summary Introduction

To explain: The possible least risky security.

Answer 24

c.

Expert Solution

Answer to Problem 1Q

There is no security which is totally riskless.
But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.

Answer 25

c.

Expert Solution

Answer 26

c.

Expert Solution

Answer 27

Expert Solution

Answer 28

Explanation of Solution

The securities always contain some risk in it. There are many factors which effect the security or the stock.
These are the interest rates and the inflation rates.
There is no such security which is considered to be riskless.
However, the treasury bills are backed by the U.S. government, so these are less risky.
The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.

Answer 29

Conclusion

Thus, the Treasury inflation-protected securities are the least risky security.

Answer 30

Ch. 8 - Prob. 1Q Ch. 8 - Prob. 2Q Ch. 8 - Prob. 3Q Ch. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8Q Ch. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 10Q

Answer to Problem 1Q

Explanation of Solution

To explain: The possibility of Treasury bill portfolio being riskless.

Answer to Problem 1Q

Explanation of Solution

To explain: The possible least risky security.

Answer to Problem 1Q

Explanation of Solution

Want to see more full solutions like this?

Chapter 8 Solutions