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?
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?
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 9PROB
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Question
INV 2 -1
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?
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