Theory:

     “But why do you carry such an ordinary blanket with you? Surely, you are the governor of a district?” the king asked. To which the shepherd replied with quiet dignity, “This blanket is my oldest friend. It will still protect me if, at any time, Your Majesty should wish to take away my new cloaks.”
 
     How pleased the king was, and how embarrassed the jealous governors became to hear the wise man’s reply! Now they knew that the shepherd was indeed the humblest and the wisest man in the land. The king made him the governor of a much bigger district that very day.
Explanation:

The king was quite surprised about the secret behind the iron chest. He wanted to know the reason behind carrying such an old blanket along with himself always, despite being a governor. So, the king raised the same question to the shepherd. The shepherd answered the king with quiet dignity. He said the blanket was his oldest friend. The shepherd carries his old blanket along, as he believes it would protect him, even if the king takes away his power. Unlike the position he holds and the beautiful cloaks he wears, the blanket is more reliable and permanent.

The king was pleased with the wise shepherd's humility and intelligence. On the other hand, the jealous governors felt ashamed of their actions against the new governor when they heard the reply. Now, everyone, including the other governors, realised the shepherd's noble qualities. Not just the king, but the governors too accepted him as a humble and wise person of the land.

It was the second time that the king rewarded the shepherd for his wisdom and humility. This time, the shepherd was appointed as the governor of a much bigger district on the same day.
 
The king's reward.jpg
The king's reward
 
Meaning of difficult words:
 
S.No.
Words
Meaning
1.
Embarrassed
Feeling uncomfortable or ashamed of something
Reference:
National Council of Educational Research and Training (2006). The Shepherd's Treasure (pp. 07-10). Published at the Publication Division by the Secretary, National Council of Educational Research and Training, Sri Aurobindo Marg, New Delhi.