Question 8

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $60,000 or $175,000, with equal probabilities of 0.5. If you require a return of 12%, how much are you willing to pay for this portfolio?

Question 9

Out of the many stocks that you can invest in, consider stocks X and Y. Stock X has an expected return of 8% and a standard deviation of 35%. Stock Y has an expected return of 15% and a standard deviation of 65%. The correlation between the two stocks is -1. If you can also borrow/invest at the risk-free rate and the risk-free rate is 4%, what combination of these three assets would give you the best risk-return trade-off? Why?