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Unformatted text preview: Problem Set 4 Chapter 6 4. Consider a risky portfolio. The end of year cash flow derived from the portfolio is either $70,000 or $200,000 with equal probabilities of .5. The alternative risk free investment in T-bills pays 6% per year. 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? Use these inputs for problems 13 through 16: you manage a risky portfolio with expected rate of return of %18 and standard deviation of %28. The T-bill rate is 8%....
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- Fall '08
- Standard Deviation