PLEASE JUST ANSWER 2B) I KNOW THE ANSWER TO 2A) IS $115K (140/1.21) PLEASE INCLU

Question

PLEASE JUST ANSWER 2B) I KNOW THE ANSWER TO 2A) IS $115K (140/1.21)

PLEASE INCLUDE AN EXPLANATION OF YOUR ANSWER TO 2B))

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? Suppose your portfolio can be purchased for the amount in (2a). What is its expected rate of return on the portfolio?

Explanation / Answer

Ans to 2B)

Expected value of portfolio = sum of (probabilities*cashflow)

=0.15*1500000+0.5*250000+0.35*(-600000)

=$140,000

So Expected rate of return = (Expected value-Amount willing to paid for portfolio)/(Amount willing to paid for portfolio))

here Amount willing to paid for portfolio =$115,000 (which is answer to part 2A)

=(14000-115000)/115000

=21.74%

so Expected rate of return on portfolio =21.74%

ans:21.74%

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