Based on current dividend yields and expected capital gains, the expected rates

Question

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 7.7% and 9.6%, respectively. The beta of A is .9, while that of B is 1.8. The T-bill rate is currently 4%, while the expected rate of return of the S&P 500 index is 8%. The standard deviation of portfolio A is 14% annually, while that of B is 35%, and that of the index is 24%.

If you currently hold a market index portfolio, what would be the alpha for Portfolios A and B? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Portfolio A __________%

Portfolio B __________%

b-1.

If instead you could invest only in bills and one of these portfolios, calculate the sharpe measure for Portfolios A and B. (Round your answers to 2 decimal places.)

Portfolio A __________%

Portfolio B __________%

Which portfolio would you choose?

Portfolio A

Portfolio B

If you currently hold a market index portfolio, what would be the alpha for Portfolios A and B? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Portfolio A __________%

Portfolio B __________%

b-1.

If instead you could invest only in bills and one of these portfolios, calculate the sharpe measure for Portfolios A and B. (Round your answers to 2 decimal places.)

Portfolio A __________%

Portfolio B __________%

Which portfolio would you choose?

Portfolio A

Portfolio B

Explanation / Answer

a) Alpha = Portfolio Returns - Market Returns

Portfolio A Alpha = 7.7% - 8% = -0.3%

Portfolio B Alpha = 9.6% - 8% = 1.6%

b) Sharpe Ratio = (Rp - Rf) / SDp

For A, Sharpe Ratio = (7.7% - 4%) / 14% = 26.4%

For B, Sharpe Ratio = (9.6% - 4%) / 35% = 16.0%

c) Choose Portfolio A as it has higher Sharpe Ratio

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