Finance

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $200,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 6 percent per year.

a) If you require a risk premium of 12 percent, how much will you be willing to pay for the portfolio?

b) Suppose that the portfolio can be purchased for the amount in a). What will be the expected rate of return on the portfolio?

  1. 👍 0
  2. 👎 0
  3. 👁 458
  1. a) 118,421.05
    b) 14%

    1. 👍 0
    2. 👎 0

Respond to this Question

First Name

Your Response

Similar Questions

  1. Investing ( pease help)

    You hold a diversified $ 100,000 portfolio consisting of 20 stocks with 5000 invested in each . The portfolio's beta is 1.12. You plan to sell a stock with b=0.90 and use the proceeds to buy a new stock with b=1.75. what will the

    asked by Lindsey on July 24, 2009
  2. investing

    You have a $ 2 million portfolio consisting of $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth one stock with a beta of 0.9 and using the proceeds to

    asked by Kristy on May 4, 2011
  3. Basic Economics

    Assume the beta on Royalty Pharma's portfolio of assets is 1, the risk-free rate is 0.5% per year, and the market portfolio’s risk premium is 6% per year. According to the CAPM, what is Royalty Pharma's expected return? (Note:

    asked by Student22 on March 11, 2020
  4. Financial

    Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to

    asked by Alec on March 24, 2014
  5. Math

    Sonny owns $5,000 worth of High Risk Enterprises (HRE) stock. HRE has a standard deviation of 16 percent and a beta of 2.0. He wants to invest another $5,000 and create a $10,000 portfolio that is equally as risky as the overall

    asked by brandon on October 26, 2009
  1. Finance

    Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be

    asked by marvin on August 16, 2010
  2. finance

    New project analysis You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would

    asked by GARY on June 9, 2008
  3. accounting

    Financial Statement Analysis Portfolio The Income Statement for Pumpkin Co. is shown below: Pumpkin Co. Income Statement for the Month Ended October 21, 2010 revenues sales $120,000.00 operating expenses salary expense $10,000.00

    asked by mya on May 3, 2020
  4. Finance

    6. You are scheduled to pay a $350 cash flow in one year, and receive a $1,000 cash flow in years 3 and 4. If interest rates are 10 percent per year, what is the combined present value of these cash flows?

    asked by Dashawn on October 13, 2014
  5. finance

    How does an investor earn more than the return generated by the tangency portfolio and still stay on the security market line? a. Borrow at the risk free rate and invest in the tangency portfolio. b. Add high risk/return assets to

    asked by anonymous on November 12, 2012
  6. finance

    I'm having a terrible time understanding how to estimate cash flow. My book only provides one example, and it's long and drawn out. The question I'm working on is this: A project that is expected to last six years will generate a

    asked by Marie on December 10, 2007

You can view more similar questions or ask a new question.