Question

1.

Consider the following information: State of Probability of Portfolio Return Economy State of Economy If State Occurs Recession .28 - 13 Boom .72 .23 Calculate the expected return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return

2. Fill in the blanks

Answer 1

1.
=Sum(probability*returns)
=0.28*(-0.13)+0.72*0.23=0.1292

2.
=(return-risk free rate)/beta
=(15.2%-5.4%)/1.4=0.07

3.
=(return-risk free rate)/beta
=(9.1%-5.4%)/0.7=0.052857143

4.
=market risk premium/1
=(6.4%)/1=0.064

5.
Undervalued as reward to risk ratio is more than SML reward to risk ratio

6.
Overvalued as reward to risk ratio is less than SML reward to risk ratio