What is the least risky security can think of

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Question 1. 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 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.

c. What is the least risky security you can think of? Explain.

Question 2. Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain.

Question 3. If investors' aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.

 

Reference no: EM132900731

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