A) Suppose Royalty Pharma's portfolio consists of equally-weighted royalty interests in 40 approved and marketed biopharmaceutical products. Assume each royalty stream has an annualized expected return of 6.5%, and return standard deviation of 20%.

If the correlation amongst projects is 10%, then what is the annualized expected return of the portfolio. (Note: Your answers should be numbers in percentage form. Do not enter '%'.)

E[]= ____%

B) If the distribution of portfolio returns is given by a normal distribution, then what is the probability that Royalty Pharma's equity holders suffer a loss greater than 10%? Assume an approximately even mixture of debt and equity: $4.2 billion and $4.0 billion, respectively. In addition, for simplicity, assume the yield on Royalty Pharma's debt is 0%. (Note: Your answer should be a number in percentage form. Do not enter '%'.)

Hint: What is Royalty Pharma's leverage ratio? Also, the area in the left tail of the standard normal distribution can be found using an online calculator such as WolframAlpha.

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C) What is the probability that Royalty Pharma's equity holders suffer a loss greater than 10% if the correlation amongst projects turns out to be 40%, instead of 10%?

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