Question: Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 9.5% and 12.5%, respectively. The

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 9.5% and 12.5%, respectively. The beta of A is 0.8, while that of B is 1.7. The T-bill rate is currently 5%, while the expected rate of return of the S&P 500 index is 10%. The standard deviation of portfolio A is 15% annually, while that of B is 36%, and that of the index is 25%.

Think about what are the appropriate performance measures to use in this question and why.

1A. If you currently hold a market index portfolio, what would be the alpha for Portfolios A and Portfolio B?

1B. If instead you could invest only in bills and one of these portfolios, calculate the sharpe measure for Portfolio A and Portfolio B.

(Negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a decimal rounded to 3 decimal place.)

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