You are considering investing in one of two well-diversified portfolios. Portfolio A has an expected return of 8% and a beta of 1.35 while Portfolio B has an expected return of 6% and a beta of 0.80. Assuming that you are a rational risk-averse investor and the risk-free rate is 2%, which of the two portfolios should you choose and why?

• A.

  Portfolio A because it has a higher risk premium.

• B.

  Portfolio B because it has less market risk.

• C.

  Portfolio B because it has a higher reward-to-risk ratio.

• D.

  Portfolio A because it offers a greater reward per unit of risk.