Question: Portfolios A and B are actively managed. Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and

Portfolios A and B are actively managed. Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 18%, respectively. The beta of A is 0.6, while that of B is 1.2. The T-bill rate is currently 3%, while the expected rate of return of the S&P 500 index is 13%. The standard deviation of portfolio A is 27% annually, while that of B is 34%, and that of the index is 25%. If you hold S&P 500 Index and are looking to add and active component to your portfolio, which portfolio will you select?

Portfolio B

Both portfolios A and B, because they have the same contribution

Neither, as both A and B have negative contribution

Portfolio A

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