Week 7 Discussion Due May 15, 2015 In Your Own Words

Week 7discussion Due May 15 2015in Your Own Words 75 150 Words

Week 7discussion Due May 15 2015in Your Own Words 75 150 Words

What is the risk profile of a portfolio consisting of U.S. government bonds with a 30-year maturity? Is it riskless? How does this compare with a portfolio of 30-day Treasury bills that are continually reinvested? Considering the investment income needed to maintain a living standard, is such a portfolio truly free of risk? What asset could be considered nearly riskless, and why?

Paper For Above instruction

The risk profile of a portfolio comprising U.S. government bonds with a 30-year maturity is relatively low but not entirely riskless. Long-term government bonds are subject to interest rate risk; if market interest rates rise, bond prices decline, potentially reducing the portfolio's value. Additionally, inflation risk can erode the purchasing power of fixed interest income over time. While these bonds are backed by the U.S. government and are considered with minimal default risk, their susceptibility to interest rate fluctuations makes them not entirely riskless. Conversely, a portfolio of 30-day Treasury bills, which are rolled over continually, presents less interest rate risk because maturities are short, and reinvestment occurs frequently. However, it still faces inflation risk and reinvestment risk—uncertainties about future interest rates. Given these considerations, neither portfolio is truly riskless, especially when accounting for inflation and interest rate changes. In theory, the closest to riskless assets are U.S. Treasury securities, like Treasury bills or Treasury Inflation-Protected Securities (TIPS), which are considered as close to riskless as possible due to their backing by the U.S. government. Nonetheless, all investments carry some degree of risk, notably inflation risk.

References

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