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. What is the portfolio P’s beta?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
INV 2 -1b
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.
What is the portfolio P’s beta?
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