How much would she be willing to pay for the portfolio now

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Reference no: EM132210930

Question: Ella has been offered the chance to invest in a risky portfolio. In one year's time the portfolio...
Ella has been offered the chance to invest in a risky portfolio. In one year's time the portfolio will be worth either $ 70,000 or $ 200,000 with equal probabilities. Alternatively, she could invest in treasury bills which are risk-free and pay 2% per year. The market risk premium is 5% per year.

(1) If Ella requires a risk premium of 8% per year for investing in the risky portfolio, how much would she be willing to pay for the portfolio now?

(2) Suppose that the covariance of the risky portfolio with the market portfolio falls by half while everything else remains the same. According to the Capital Asset Pricing Model, how much would Ela be willing to pay for the risky portfolio now?

Reference no: EM132210930

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