Question $2$

Consider a risky asset. The end$-$of$-$year cash$-$flow derived from the asset will be either $0$ with probability

$0\mathrm{.}90$ or $$50,000,000$ with probability $0\mathrm{.}10.$ The risk$-$free rate is $4\%$ per year.

a$)$ If investors require a risk$-$premium of $12\%$ per year to hold the asset, how much are investors willing

to pay for the asset?

b$)$ Suppose that the asset pay$-$off $($and therefore the return of investing on the asset$)$ is uncorrelated with

the Market Portfolio $($i$.$e$.,{}_{iM}=0$ where i represents this asset$).$ Under the assumptions of the CAPM, how

much are investors willing to pay for the asset?