4. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either

$70,000 or $200,000 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 8%, how much will you be willing to pay for the portfolio?

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?

c. Now suppose that you require a risk premium of 12%. What is the price that you will be willing to pay?

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?