Question

Consider a risky portfolio. The end-of-year cash áow derived from the portfolio will be either $50,000...

Consider a risky portfolio. The end-of-year cash áow derived from the portfolio will be either $50,000 with probability 0.6 or $150,000 with probability 0.4. The alternative riskless investment in T-bill 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 be the expected rate of return on the portfolio?

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

Homework Answers

Answer #1

Calculation is given in the below attached images

Please give upvote and thank you for that in advance

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000...
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 .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? (Round your answer to the nearest dollar amount.) Value of the portfolio $________________ (Note answer is not $100,000) I did this but it is not correct 50000*0.5+150000*0.5
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000...
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000 or $135,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. a. If you require a risk premium of 10%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return...
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $60,000...
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $60,000 or $170,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 6%. a. If you require a risk premium of 10%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return...
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $12,000...
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $12,000 or $38,000. The probability that the cash flow will be $12,000 is 40%. The alternative riskless investment in T-bills pays 3%. If you require a risk premium of 9%, how much will you be willing to pay for the portfolio? A. $23585 B. $22321 C. $24643 D. $26038
Risk averse investors require a positive risk premium to compen- sate for risks they take while...
Risk averse investors require a positive risk premium to compen- sate for risks they take while risk neutral investors donít. Consider a risky portfolio. The end-of-year cash áow derived from the portfolio will be either $42,000 with probability 0.6 or $140,000 with probability 0.4. Your friend is risk neutral. She is willing to pay $80,000 for this risky portfolio today. (a) What is the risk free rate implied? Show your work. (b) You are risk averse, you require a risk...
You are managing a risky portfolio with an expected rate of return of 17% and a...
You are managing a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. You think that this risky portfolio is best one that you can construct to deliver the best tradeoff between risk premium and return. The T-bill rate is 7%. (1)Your client Eric chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. (a) What is the expected return and standard deviation of your...
Suppose a bank has $100 million of assets to invest in either risky or safe investments....
Suppose a bank has $100 million of assets to invest in either risky or safe investments. The first option is to put all assets in the safe investment, which will result in a 5% return and yield $105 one year from now. A second option is to put all the assets in the risky option, which will result in either a 50% return ($150 million) or a 40% loss ($60 million) with equal probability. If the bank can pay to...
         3.   a)            When adding a risky asset to a portfolio of many risky assets, which...
         3.   a)            When adding a risky asset to a portfolio of many risky assets, which property of the asset                                 is more important, its standard deviation or its covariance with the other assets? Explain. b)            Suppose that the risky premium on the market portfolio is estimated at 8% with a standard deviation of 22%. What is the risk premium of a portfolio invested 25% in CEMENCO and 75% in Monrovia Breweries, if they have Betas of 1.1 and 1.25...
Investment Portfolio Analysis Consider the possible rates of return that you might earn next year on...
Investment Portfolio Analysis Consider the possible rates of return that you might earn next year on a $50,000 investment in stock A or on a $50,000 investment in stock B, depending upon the states of the economy: recession, normal, and prosperity. For stock A: State of Economy Return (ri) Probability (pi) Recession -5% 0.2 Normal 20% 0.6 Prosperity 40% 0.2 For stock B: State of Economy Return (ri) Probability (pi) Recession 10% 0.2 Normal 15% 0.6 Prosperity 20% 0.2 What...
1. Suppose that your company is expected to pay a dividend of $1.70/share next year. There...
1. Suppose that your company is expected to pay a dividend of $1.70/share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $35. What is the cost of equity? a) 0.099 b) 0.200 c) 0.051 d) 0.102 2. Which one of the following is best classified as unsystematic risk? a) An unexpected recessionary period b) An unexpected increase in interest rates c) Labour Strike...