Chapter 18, Problem 8PS

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are $\text{12}\%$ and $\text{16}\%$ , respectively. The beta of A is $0.\text{7}$ , while that of B is $\text{1}.\text{4}$ . The T-bill rate is currently $\text{5}\%$ , whereas the expected rate of return of the S&P $\text{5}00$ index is $\text{13}\%$ . The standard deviation of portfolio A is $\text{12}\%$ annually, that of B is $\text{31}\%$ , and that of the S&P $\text{5}00$ index is $\text{18}\%$ .
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 e0u1d invest only in T-bills and one of these portfolios, which would you choose? $\left(\text{LO 18}-\text{2}\right)$