are they all the same? This is for an Economics assignment and according to info I have found on the internet, it appears that they are all the same. Does anyone out there know about treasury bonds?
2007-10-22 05:10:59 · 2 answers · asked by sally 5 in Business & Finance ➔ Investing
This is a tricky question -- because I think he wants the answer to be NO -- but the real answer is YES.
Let me explain.
When talking about modern portfolio theory, we talk about diversification as being the benefits of having a diversified portfolio. Recall that there are two kinds of risk in an asset -- market risk and company specific rick. Market risk is not diversifiable and is measured by beta. The other risk goes away as we get more securities.
We usually also talk about a risk free security where you are guaranteed a fixed return. In theory, this asset has a fixed return that you always get. Its beta is zero, and its volatility is also zero. This cannot be diversified -- because there is no risk to get rid of.
So -- in this model, treasury bonds are all riskless -- because the return is guaranteed.
Now -- here is where we get to the tricky part. If we look at a one year treasury note and a ten year treasury note, what we get is that the one year has a guaranteed payment over one year & the ten year has a guaranteed payment over ten years. But if we were to look at a one year period, the ten year's return is not guaranteed. It has interest rate risk that affects the price when we sell it. It actually does have a standard deviation for one year that is not equal to zero. This risk is diversifiable to an extent. However -- I doubt that this is the answer your professor is looking for.
2007-10-22 05:27:52 · answer #1 · answered by Ranto 7 · 1⤊ 0⤋
Treasury bonds are all government issued bonds and although they can not be diversified, they can be used in a portfolio for diversificiation. For example if your poftfolio has 50% stock 50% bonds. Now the the treasury bonds come in different maturities, depending on how long and what your goals are you can buy treasury bond w/ different maturities.
I hope this helps a bit.
2007-10-22 12:15:51 · answer #2 · answered by girlygurl23 2 · 1⤊ 0⤋