Imagine you are choosing between two portfolios, and you believe the CAPM is the correct pricing model. Portfolio A has a market beta of βA = 0.6. Portfolio B has a market beta of βB = 0.9. The average excess return for A is 6%, while for B the average excess return is 8.5%. The average excess return on the market is 7%. The standard deviation of A's return is 12%, and for B is 18%.

(a) Which portfolio, A or B, has a higher alpha?

(b) Which portfolio has a higher Sharpe ratio?

(c) If you could borrow as much as you want at the risk-free rate (say r f = 1%), and you wanted your investment portfolio to have a market beta of Bp = 1, how would you construct such a portfolio? Explain.

Answer rating: 100% (QA)

To determine which portfolio has a higher alpha we need to compare the excess returns of the portfol... View the full answer