Penny Francis inherited a$200,000 portfolio of investments from her grandparents when she turned 21 years of age. The portfolio is comprised of Treasury bills and stock in Ford(F) and Harley Davidson(HOG):

a. Based on the current portfolio composition and the expected rates ofreturn, what is the expected rate of return forPenny's portfolio?

b. If Penny wants to increase her expected portfolio rate ofreturn, she can increase the allocated weight of the portfolio she has invested in stock(Ford and HarleyDavidson) and decrease her holdings of Treasury bills. If Penny moves all her money out of Treasury bills and splits it evenly between the twostocks, what will be her expected rate ofreturn?

c. If Penny does move money out of Treasury bills and into the twostocks, she will reap a higher expected portfolioreturn, so why would anyone want to hold Treasury bills in theirportfolio?

Expected Return			$ Value
Treasury bills	4.6%		85,000
Ford(F)	6.4%		55,000