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What will the expected rate of return on the portfolio be

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Question - Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either 35 150,000 or $450,000, with probabilities of 0.3 and 0.7, respectively. The alternative riskless investment in T - bills pays 4%.

i. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio?

ii. Suppose the portfolio can be purchased for the amount you found in (i). What will the expected rate of return on the portfolio be?

iii. Now suppose you require a risk premium of 12%. What is the price you will be willing to pay now?

iv. Comparing your answers to (i) and (ii), what do you conclude about the relationship between the required risk premium on a portfolio and the price at which the portfolio will sell?

Reference no: EM133181019

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