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. Does portfolio P have a positive or negative alpha relative to its required return given its level of risk?
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. Does portfolio P have a positive or negative alpha relative to its required return given its level of risk?
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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INV2 P1 3
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.
Does portfolio P have a positive or negative alpha relative to its required return given its level of risk?
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