Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 with a probability of 25%, $125,000 with a probability of 50%, or $140,000 with a probability of 25%. The alternative risk-free investment in T-bills pays 4% per year. a) If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? b) What is the Sharpe ratio of the portfolio if you can purchase it at the price calculated above?

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 with a probability of 25%, $125,000 with a probability of 50%, or $140,000 with a probability of 25%. The alternative risk-free investment in T-bills pays 4% per year. a) If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? b) What is the Sharpe ratio of the portfolio if you can purchase it at the price calculated above?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 5P

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