5. Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8, while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%.

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

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

6. Evaluate the timing and selection abilities of the four managers whose performances are plotted in the following four scatter diagrams.

Number of months that for 135 Correctly predicted by timer A 78 Correctly predicted by timer B 86 Number of months that 92 Correctly predicted by timer A 57 Correctly predicted by timer B 50 (1) (2) (3) (4) Actual Actual Benchmark Index Return Weight Weight Return Equity 2.0% 0.70 0.60 2.5% (S&P 500) Bonds 1.0 0.20 0.30 1.2 (Aggregate Bond Index) Cash 0.5 0.10 0.10 0.5