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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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