Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $140,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 6%. a. If you require a risk premium of 11%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.)

$95,000

Explanation:

We are to Consider a risky portfolio, that at  the end-of-year cash flow derived from the portfolio will be either $50,000 or $140,000, with equal probabilities of 0.5.

That means;

the portfolio  may generate either  $50,000 or $140,000

Let the cash flow  in the scenario 1 = $50,000

Let the cash flow in the scenario 2 = $140,000

For both scenario; the probability is the same = 0.5

The amount that  the investor will  be willing to pay for the portfolio is the (Expected cash from portfolio) which can be calculated as follows:

Expected cash from portfolio =

where:

= Expected cash flow at the end of year in scenario 1 = $50,000

= Expected cash flow at the end of year in scenario 2 = $140,000

= probability of occurrence of scenario 1 = 0.5

= probability of occurrence of scenario 2 = 0,5

NOW;

Expected cash from portfolio = ($50,000× 0.5)+ ($140,000×0.5)

Expected cash from portfolio = $25,000 + $70,000

Expected cash from portfolio = $95,000

Thus, as an investor, I will be willing to pay $95,000 for the portfolio.