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onsider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $80,000 or $220,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 5% per year. a. If you require a risk premium of 5%, how much will you be willing to pay for the portfolio

Respuesta :

Answer:

$136,363

Explanation:

For computing the willing amount to pay, first we have to determine the expected cash flow that is shown below:

Expected cash flow is

= $80,000 × 0.5 + $220,000 × 0.5

= $40,000 + $110,000

= $150,000

Now the willing amount is

= Expected cash flow × 1 ÷ (1 + risk free investment + risk premium)

= $150,000 × 1 ÷ (1 + 10%)

= $150,000 × 0.9090

= $136,363

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