Final answer:
This question involves the concept of investing in a portfolio with Treasury bills and risky assets. It emphasizes the importance of understanding compound interest, risk vs return, and the necessity for high-risk investments to have the potential for higher returns to be attractive to investors.
Step-by-step explanation:
The question you are asking relates to investing a sum of money into a portfolio consisting of Treasury bills and a risky portfolio ('P') that includes two risky assets. When considering investments like these, it's important to understand key investment principles, such as the power of compound interest and the tradeoff between risk and expected returns.
Starting to save early and investing in a well-diversified stock portfolio can significantly increase your wealth over time. For example, a $3,000 investment at a 7% real annual rate of return over 40 years would grow to $44,923 due to compound interest. Investments in stocks tend to have higher average returns compared to bonds and savings accounts due to the higher risk involved, which is compensated by the potential for higher returns.
Understanding the relationship between risk and return is critical when constructing a portfolio. High-risk investments can lead to both high and low returns, but on average, they must offer a higher expected return to attract investors. For your investment of $2,300, you would need to decide on the allocation between the risk-free Treasury bills and the riskier assets in portfolio 'P' based on your own risk tolerance and investment objectives.