please include explanation in your answer Suppose now that you get promoted to m

Question

please include explanation in your answer

Suppose now that you get promoted to manage another equity portfolio in the risky biotech sector. This time, your future expectations are that this portfolio will generate the following cash flows given the same probabilities of the state of the market from the above question: Again, the risk-free investment in T-bills pays 3% per year. Your brother ("the Big Shot") says that he requires a risk premium of 18% before he would invest with you. How much would he be willing to pay for the portfolio?

Explanation / Answer

expected cash flow at end of year =0.15*1500000+0.5*250000-0.35*600000 =140000

req rate of return = 0.03+0.18 = 21%

willing to pay =140000/1.21 = $115702.48

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