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Determining the expected return and standard deviation

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Reference no: EM131238404

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:

  1. Is P efficient? What is the beta of portfolio P?
  2. What is the alpha of portfolio P? Is P overpriced or underpriced?

Reference no: EM131238404

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