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 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 0.8.

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?

Hint: a = Actual expected return - Required return (given risk)