Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%.
a. If you currently hold a market index portfolio, would you choose to add either of these portfolios to your holdings? Explain.
b. If instead you could invest only in bills and one of these portfolios, which would you choose?
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