Riskless asset and risky portfolio now suppose you require, Financial Management

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Riskless asset and risky portfolio now suppose you require

Riskless asset and risky portfolio

Consider a risk portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $120,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 5%.

A. Now suppose you require a risk premium of 15%. What is the price you will be willing today?

B. What do you conclude about the relationship between the required risk premium on a portfolio and the price at which the portfolio will sell?

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