Consider a risky portfolio. The end-of-year cash flow derived from the portfolio
ID: 2631653 • Letter: C
Question
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either S40,000 or $125.000, with equal probabilities of 0 5. The alternative riskless investment in T-bills pays 6%. a. If you require a risk premium of 8%. how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) Value of the portfolio 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.) Rate of return c. Now suppose you require a risk premium of 13%. What is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.) Value of the portfolioExplanation / Answer
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Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000 or $135,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%.
If you require a risk premium of 10%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.)
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.)
Now suppose you require a risk premium of 15%. What is the price you will be willing to pay now?(Round your answer to the nearest dollar amount.)
Value of the portfolio
Answer:
a. risk premium = required return - risk free rate
required return = 10%+4% = 14%
Expected value of the payoff = 40000*1/2 + 135000*1/2 =$87500
Value of portfolio = 87500/(1+14%) = $76,754
b. the expected rate of return on the portfolio = (87500-76,754.39)/76,754.39 = 14%
c.risk premium = required return - risk free rate
required return = 15%+4% = 19%
Expected value of the payoff = 40000*1/2 + 135000*1/2 =$87500
Value of portfolio = 87500/(1+19%) = $73529
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*please explain how to do*
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000 or $135,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%.