Question

An investor has created a two -asset portfolio today by purchasing $40,000 in Treasury bills and $120,000 in the S&P 500 Index (market portfolio). Currently, the annual return on the Treasury bill is 2%, while investors seek 6% for the market portfolio risk premium. If the portfolio earns its required return each of the next 5 years, what will be the future value of this portfolio at the end of the 5th year? Question 21 options:

$131,874

$235,093

$178,449

$219,214

$194,664

Answer 1

Future Value:
FV = PV (1+r)^n
Where r is Int rate per period
n - No. of periods:

Future Value of portfolio = FV of securities in that Portfolio.

FV of Treasury Bill :

Future Value = Present Value * ( 1 + r )^n

= $ 40000 ( 1 + 0.02) ^ 5

= $ 40000 ( 1.02 ^ 5)

= $ 40000 * 1.1041

= $ 44163.23

Required Ret of Market = Rf + Risk Premium

= 2% + 6%

= 8%

FV of Market :

Future Value = Present Value * ( 1 + r )^n

= $ 120000 ( 1 + 0.08) ^ 5

= $ 120000 ( 1.08 ^ 5)

= $ 120000 * 1.4693

= $ 176319.37

Value of Portfolio =  FV of Treasury Bill + FV of Market

= $ 44163.23 + $ 176319.37

= $ 220,482.60

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