You are considering an investment in a portfolio P with the following expected returns in three different states of nature:   Recession Steady Expansion Probability 0.10 0.55 0.35 Return on P -15% 20% 40%   The risk-free rate is currently 4%, and the market portfolio M has an expected return of 16% and standard deviation of 20%, and its correlation with P is .7.  Is P an efficient portfolio relative to the market?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You are considering an investment in a portfolio P with the following expected returns in three different states of nature:

 

Recession

Steady

Expansion

Probability

0.10

0.55

0.35

Return on P

-15%

20%

40%

 

The risk-free rate is currently 4%, and the market portfolio M has an expected return of 16% and standard deviation of 20%, and its correlation with P is .7. 

  1. Is P an efficient portfolio relative to the market?
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