INV 2 -1c 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

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INV 2 -1c

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. 

c. 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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