Problem 1:
Suppose the return on portfolio P has the following probability distribution:
|
Bear Market
|
Normal market
|
Bull market
|
|
Probability
|
0.2
|
0.5
|
0.3
|
|
Return on P
|
-20%
|
18%
|
50%
|
Assume that the risk-free rate is 9%, and the expected return and standard deviation on the market portfolio M is 0.19 and 0.20, respectively. The correlation coefficient between portfolio P and the market portfolio M is 0.6.
Answer the following questions:
- Is P efficient?
- What is the beta of portfolio P?
- What is the alpha of portfolio P? Is P overpriced or underpriced?