Problem 1 (15 marks)

You are considering an investment in a portfolio P with the following expected returns in three different states of nature:

	Recession	Steady	Expansion
Probability	0.20	0.40	0.20
Return on P	-10%	22%	45%

The risk-free rate is currently 3%, and the market portfolio M has an expected return of 12% and standard deviation of 18%, and its correlation with P is .6.

• Is P an efficient portfolio relative to the market?
• What is the portfolio Ps beta?
• Does portfolio P have a positive or negative alpha relative to its required return given its level of risk? Would you characterize P as a buy or sell, and why?