Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000 or $120,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%.

a. If you require a risk premium of 7%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.)

b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be? (Do not round intermediate calculations. Round your answer to the nearest whole percent.)

c. Now suppose you require a risk premium of 12%. What is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.)

Expert Solution

Given,

The end-of-year cash flow derived from the portfolio will be either $40,000 or $120,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%.

Solution :-

jeff jeffy answered 4 months ago

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