Answer:
a. $76,754
.38
b. 14%
c. $73,529
Explanation:
a. The computation of portfolio is given below:-
Risk Premium
= Required return - Risk free rate
= 10% + 4%
= 14%
Expected value of the payoff
= $40,000 × 1 ÷ 2 + $135,000 × 1 ÷ 2
= $87,500
Value of portfolio = $87,500 ÷ (1 + 14%)
= $76,754.39
b. The calculation of expected rate of return on the portfolio is shown below:-
= ($87,500 - $76,754.39) ÷ $76,754.39
= 14%
c. The calculation of risk premium is shown below:-
Risk premium = Required return - Risk free rate
Required return = 15%+4% = 19%
Expected rate of the payoff
= $40,000 × 1 ÷ 2 + $135,000 × 1 ÷ 2
=$87500
Value of portfolio
= $87,500 ÷ (1 + 19%)
= $73,529
