You are on the board of the Springfield College Endowment Fund (SC E F), which is evaluating two potential managers for its investments: Mr. Monty Burns (M B) and Mr. Waylon Smithers (W S). The expected returns on portfolios M B and W S are 11% and 14%, respectively. The beta of M B is 0.8 while that of W S is 1.5. The T-Bill rate is 7%, while the expected return of the market index is 12%. The standard deviation of portfolio M B is 10%, while that of W S is 31%, and that of the index is 20%. The board has decided that the CAPM is the appropriate risk-return model to use when evaluating portfolio managers.

(a) Suppose SC E F currently holds a market index portfolio. Based on the data, would you add portfolios M B and/or W S to SC E Fs mix of holdings?

(b) If SC E F were ordered to invest only in T-Bills and one of the portfolios M B or W S, which portfolio should SC E F invest? Why?