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Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $100,000 or $260,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 3% per year.

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 whole dollar amount. Omit the "$" sign in your response.)

Price $

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? (Round your answer to the nearest whole number. Omit the "%" sign in your response.)

Rate of return %

c. Now suppose that you require a risk premium of 11%. What is the price that you will be willing to pay? (Round your answer to the nearest whole dollar amount. Omit the "$" sign in your response.)

Price $

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92320356

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