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FinanceQ&A LibraryBased on current dividend yields and expected capital gains, the expected rates or return on portfolios A and B are 12% and 18%, respectively. The beta of A is 0.7 while that of B is 1.6. The T-bill rate is currently 4% while the expected rate of return of the S&P500 Index is 13%. The standard deviation of portfolio A is 14% annually, while that of B is 26%, and that of the index is 15%.If you currently hold a market-index portfolio, would you chose to add either of these portfolios to your holdings?Question

Asked Oct 22, 2019

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Based on current dividend yields and expected capital gains, the expected rates or return on portfolios A and B are 12% and 18%, respectively. The beta of A is 0.7 while that of B is 1.6. The T-bill rate is currently 4% while the expected rate of return of the S&P500 Index is 13%. The standard deviation of portfolio A is 14% annually, while that of B is 26%, and that of the index is 15%.

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

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Step 1

Capital asset pricing model can be used to study the how systematic risk on a particular asset is linked to expected return on the same asset.

The formula to calculate expected return using CAPM model is given below:

Step 2

To calculate expected return on portfolio A,

Substitute 4% for *R _{f}*, 0.7 for

Step 3

To calculate expected return on portfolio B,

Substitute 4% for *Rf*, 1.6 for *βi* , 13...

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