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 0.8, while that of B is 1.5. The T-note rate is currently 3.5%, while the expected rate of return of the S&P 200 index is 5%. The standard deviation of portfolio A is 10% annually, while that of B is 31% and that of the index is 20%.
• If you currently hold a market index portfolio, would you choose to add either of these portfolios to your holdings?
• If instead you could invest only in notes and one of these portfolios, which would you choose?