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A
To calculate:The amount which is paid for the portfolio is 8% risk premium is to be determined.
Introduction:The present values of portfolio is defined as the contemporary values of the subsequent amount of money or called as stream of cash flow with defined
A
Answer to Problem 4PS
The present values of the portfolio= $ 118,421
Explanation of Solution
The expected cash flow is determined by the summation of the product of the probability with the cash flow in two scenarios.
Cash flow = $ 70,000 with probability 0.5
Cash flow = $200,000 with probability 0.5
The assumed cash flow = $135,000
Mentioned risk premium = 8%
Mentioned risk-free rate = 6%
Mentioned rate of return = 14%
The
Put the given values in Equ (1)
The present value of the portfolio = $118,421
B
To calculate:The assumed rate of return of the portfolio is to be determined.
Introduction:The present value of portfolio is defined as the present value of the future amount of money or called as stream of cash flow with identified rate of return.
B
Answer to Problem 4PS
The assumed rate of return = $135,000
Explanation of Solution
The assumed rate of the return is calculated by the following formula −
The assumed rate of return = $135,000
C
To calculate:Theamount which is paid for the portfolio at 12% risk premium is to be determined.
Introduction:The present value of portfolio is defined as the present value of the future amount of money or called as stream of cash flow with a stated rate of return.
C
Answer to Problem 4PS
The present value of the portfolio = $114,407
Explanation of Solution
Given that −
Risk premium = 12%
Risk-free rate = 6%
The present value of portfolio is ascertained by dividing assumed cash flow by identified rate of return.
Put the given values in Equ (1)
The present value of the portfolio = $114,407
D
To calculate:The relation between risk portfolio and the amount at which it sell is to be determined.
Introduction:The present value of portfolio is defined as the present value of the future amount of money or called as stream of cash flow with a expected rate of return.
D
Answer to Problem 4PS
The portfolio with higher risk will sell at lower price. The portfolio (a) will be selling at lower price.
Explanation of Solution
The current value of the portfolio (a) = $118,421
The current value of the portfolio (c) = $114,407
The portfolio with higher risk will be selling at lower price and providing extra discount from assumed price is a consequence of risk.
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Chapter 6 Solutions
EBK INVESTMENTS
- Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $110,000 or $280,000 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 4%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest whole dollar amount.) 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.)arrow_forwardConsider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $195,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. Required: a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) Value of the Portfolio b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be? (Do not round intermediate calculations. Round your answer to the nearest whole percent.) Rate of return % c. Now suppose you require a risk premium of 11%. What is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.) Value of the portfolioarrow_forwardConsider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 or $330,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 3% per year. Now suppose that you require a risk premium of 12%. What price are you willing to pay?.arrow_forward
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