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 0.65 0.15 Return on P -20% 18% 32% The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5. What is the portfolio P’s 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?
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 0.65 0.15 Return on P -20% 18% 32% The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5. What is the portfolio P’s 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?
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
Section: Chapter Questions
Problem 1PS
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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 |
0.20 |
0.65 |
0.15 |
Return on P |
-20% |
18% |
32% |
The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5.
- What is the portfolio P’s 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?
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