your responses should be concise, ensure that you answer each of the required components as completely as possible. If supporting calculations are required, present them in good form. When you receive your graded assignment, carefully review the comments the marker has made. This review component is an important step in your learning process. If you have any questions or concerns about the evaluation, please contact the Student Support Centre. Problem 1 (15 marks) Suppose the return on portfolio P has the following probability distribution: Probability Return on P Bear Market 0.2 -20% Normal market 0.5 18% Bull market 0.3 50% Assume that the risk-free rate is 9%, and the expected return and standard deviation on the market portfolio M is 0.19 and 0.20, respectively. The correlation coefficient between portfolio P and the market portfolio M is 0.6. Answer the following questions: 1. Is P efficient? 2. What is the beta of portfolio P? 3. What is the alpha of portfolio P? Is P overpriced or underpriced? Problem 2 (20 marks) Consider a two factor economy. Assume the risk-free rate = 3%, and the risk premiums are RP1 = 10%, RP2 = 8%. The return on stock ABC is generated according to the following equation: rABC=0.08-0.55F1+1.2F2+eABC Assume that the stock is currently priced at $50 per share. 1. What is the expected return for stock ABC using the APT? 2. Is stock ABC underpriced or overvalued? 3. If the expected price next year will be $55, what is the stock price now that will not allow for arbitrage profits? 4. Assume that the risk free rate increases to 4%, with the other variables remaining unchanged. Would you recommend to buy or sell stock ABC