Question: 3. Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly

3. Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 25% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 4%. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights as shown below. (Enter your answers as decimals rounded to 4 places. Leave no cells blank - be certain to enter "0" wherever required.) WBILL WINDEX EXPECTED RETURN VARIANCE

0.0 1.0 0.1200 0.0625 Example

0.2 0.8

0.4 0.6

0.6 0.4

0.8 0.2

1.0 0.0

2. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $115,000 or $270,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 4% per year. a. If you require a risk premium of 4%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest whole dollar amount.) PRICE= 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? (Round your answer to the nearest whole number.)

RATE OF RETURN = % c. Now suppose that you require a risk premium of 12%. What price are you willing to pay? (Round your answer to the nearest whole nuber.

PRICE=

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