Question 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 0.5. The alternative risk-free investment in T-bills pays 6% per year.

a. If you require a risk premium of 10%, how much will you be willing to pay for the portfolio?

b. Based on the price you calculated in a, above, what will be the expected rate of return on your investment?