5. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either...

5. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $200,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 6% per year.

a) If you require a risk premium of 8% so that the discount rate is 6 + 8 = 14%, how much will you be willing to pay for the portfolio?

b) Suppose that the portfolio can be purchased for the amount you found in (a). What will be the expected rate of return on the portfolio?

c) Now suppose that you require a risk premium of 12%. What is the price that you will be willing to pay?

Expert Solution

1.
=(0.5*70000+0.5*200000)/(1+6%+8%)=118421.052631579

2.
=6%+8%=14.00%

3.
=(0.5*70000+0.5*200000)/(1+6%+12%)=114406.779661017

jeff jeffy answered 2 years ago

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