4G 23:08 ezto.mheducation.com 10.00 points Consider a risky portfolio. The end-o

Question

4G 23:08 ezto.mheducation.com 10.00 points Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $80,000 or $210,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. a. If you require a risk premium of 11%, how much will you be willing to pay for the portolio? (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 wil 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 14%, what is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.) Value of the portfolio eBook & Resources Learning Objective 0541 Detenmine t relum and risk of poolios he expecie

Explanation / Answer

= $126,087*[1 + E(r)] = $145,000.

Therefore, E(r) = 15%.

The portfolio price is set to equate the expected rate of return with the required rate of return.

3. If the risk premium over T-bills is now 14%, then the required return is: 4% + 14% = 18%

The present value of the portfolio is now: $145,000/1.18 = $122,881

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