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Consider a risky portfolio.

by | Dec 1, 2023 | Posted Questions

Risky portfolio

Consider a risky portfolio. The end of year cash flow
derived from the portfolio will either be $50 000 or $150 000, with equal
probabilities of 0.5 . The alternative riskless investment in t-bills pays 5%.

1.If you require a risk premium of 10%, how much will you be
willing to pay for the portfolio?

2.Suppose the portfolio can be purchased for the amount you
found in (1). What will the expected rate on the portfolio be?

3.Now suppose you require a risk premium of 15%. What is the
price you will be willing to pay now?

4.Comparing your answers to (1) and (3), what do you
conclude about the relationship between the required risk premium on a
portfolio and the price at which the portfolio will sell?
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