Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or
Question:
a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio?
b. Suppose that 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 that you require a risk premium of 12%. What is the price that you will be willing to pay?
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?
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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a The expected cash flow is 05 70000 05 200000 135000 With a risk premium of 8 ...View the full answer
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