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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%
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?
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