Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 12% and 16%, respectively. The beta of A is .7, while that of B is 1.4. The T-bill rate is currently 5%, whereas the expected rate of return of the S&P 500 index is 13%. The standard deviation of portfolio A is 12% annually, that of B is 31%, and that of the S&P 500 index is 18%.

1. If you currently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain.

2. If instead you could invest only in T-bills and one of these portfolios, which would you choose?