10. Consider two potential portfolios, A and B. Based on current dividend yields and your estimates of expected capital gains, you expect rates of return on portfolio A is 12% and on portfolio B is 16%. The stande deviation of portfolio A is 12% annually, and the standard deviation of portfolio B is 31%. You have determined that the Beta of portfolio A is 0.7, while the Beta of portfolio B is 1.4. The current risk-free (US Treasury) rate is 5.0%. Your estimate for the expected return of the S&P 500 market index is 13%. The standard deviation of the S&P 500 index is 18%. Questions: a. If you currently hold only the market index portfolio, would you choose to add either of these portfolios (either A or B) to your overall portfolio ? Explain. (Hint: think about the CAPM). b. IF instead you could invest ONLY in Treasuries and ONLY ONE of these portfolios, would you choose A or B ? Why ? (Hint: think about one of the ratios in the Class 10 slide deck which ratio is most relevant here ?)