1. Suppose you owned a portfolio consisting entirely of long-term U. S. government bonds. Would your portfolio be riskless?

2. Suppose you owned a portfolio of 30-day U. S. Treasury bills. Every 30 days the bills mature, and you reinvest the principal in another batch of 30 day bills. Would this portfolio be riskless?

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Muffin

24 November, 12:53

1. Suppose you owned a portfolio consisting entirely of long-term U. S. government bonds. Would your portfolio be riskless?

2. Suppose you owned a portfolio of 30-day U. S. Treasury bills. Every 30 days the bills mature, and you reinvest the principal in another batch of 30 day bills. Would this portfolio be riskless?

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Yadira · Answer 1

In theory, both are riskless but in practicality they aren't completely risk free.

Explanation:

In investment theory, the investment in government bonds is riskless, irrespective of the investment maturity period because they are backed by the government.

However, in practicality every investment involves risk whether it's a short term or long term. However, a short term investment like the one specified in statement 2 involves lower time frame and thereby lower volatility, hence it implies lower risk. The investment specified in statement 1 is of longer term and hence can involve higher volatility, hence it implies higher risk.

Note - All the governments are prone to risk practically because they are also part of the global financial and economic system and hence, they have to manage their budget balances prudently. Every investment thereby involves risk, it's just the financial backing of the government financial instruments which makes them less risky as compared to the other financial instruments.