Tuesday
July 28, 2015

Homework Help: Investments/Portfolio Mgt

Posted by Anna on Monday, November 10, 2008 at 1:08pm.

How would the following be solved...
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $150,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 5%.
a. If you require a risk premium of 10%, how much will you be willing to pay for the
portfolio?
b. Suppose the portfolio can be purchased for the amount you found in (a). What will the
expected rate of return on the portfolio be?
c. Now suppose you require a risk premium of 15%. What is the price you will be willing to
pay now?
d. Comparing your answers to (a) and (c), 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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