Answer:
a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio?
the expected value of our portfolio = ($120,000 x 50%) + ($300,000 x 50%) = $210,000
the current market price of the investment = $210,000 / 1.13 = $185,840.71
discount rate = 5% + 8% = 13%
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?
13%, it should be equal to the discount rate
c. Now suppose you require a risk premium of 15%. What is the price you will be willing to pay now?
the current market price of the investment = $210,000 / 1.21 = $175,000
discount rate = 5% + 15% = 20%
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?
the higher the risk premium, the lower the market price of the portfolio
