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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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?
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