Suppose the return on portfolio P has the following probability distribution: Type of market Probability Return...

Suppose the return on portfolio P has the following probability distribution:

Type of market Probability Return

Bear 0.20 -20%

Normal 0.50 18%

Bull 0.30 50%

Assume that the risk free rate is 5% and the expected return and standard deviation on the market portfolio M is 0.15 and 0.20, respectively. The correlation coefficient between portfolio P and the market portfolio M is 0.80.

1. Is P efficient?

2. What is the beta of portfolio P?

3. What is the alpha of portfolio P? Is P overpriced or underpriced?

Expert Solution

ekkarill92 answered 2 years ago

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