Question: 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

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-1. Calculate the the return predicted by CAPM for a portfolio with a beta of 0.8.

a-2. Calculate the the return predicted by CAPM for a portfolio with a beta of 1.5.

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

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