. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 with a probability of 25%, $125,000 with a probability of 50%, or $140,000 with a probability of 25%. The alternative risk-free investment in T-bills pays 4% per year.

a) If you require a risk premium of 8%, how much will you be willing to pay for the portfolio?

b) What is the Sharpe ratio of the portfolio if you can purchase it at the price calculated above? (Need solution)