Investments, tenth edition

 Example  6.2 

The Risky Portfolio 

 What will be the dollar value of your position in equities ( E ), and its proportion in your overall portfolio, if 

you decide to hold 50% of your investment budget in Ready Asset? 

 CONCEPT CHECK 

6.4 

    6.3 

The Risk-Free Asset 

  By virtue of its power to tax and control the money supply, only the government can issue 

default-free bonds. Even the default-free guarantee by itself is not sufficient to make the 

bonds risk-free in real terms. The only risk-free asset in real terms would be a perfectly 

price-indexed bond. Moreover, a default-free perfectly indexed bond offers a guaranteed 

real rate to an investor only if the maturity of the bond is identical to the investor’s desired 

holding period. Even indexed bonds are subject to interest rate risk, because real interest 

rates change unpredictably through time. When future real rates are uncertain, so is the 

future price of indexed bonds. 

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6/18/13   8:08 PM

6/18/13   8:08 PM

Final PDF to printer

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P A R T   I I

  Portfolio Theory and Practice

 

Nevertheless, it is 

com 

mon practice to 

view Treasury bills as 

“the”