Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 9.1% and 12.1%, respectively. The beta of A is .7, 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 27% annually, while that of B is 48%, and that of the index is 37%. a. If you currently hold a market index portfolio, what would be the alpha for Portfolios A and B? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 1 decimal place.) Portfolio A % Portfolio B % b-1. If instead you could invest only in bills and one of these portfolios, calculate the sharpe measure for Portfolios A and B. (Round your answers to 2 decimal places.) Sharpe Measure Portfolio A Portfolio B b-2. Which portfolio would you choose? Portfolio A Portfolio B

A.) ALPHA

Portfolio A = 8.5%

Portflio B = 13.5%

B.) Sharpe measure

Portfolio A = 0.1519

Portflio B = 0.1479

Explanation:

T- bill rate (Rf) =5%

S&P 500 index ( Rm) = 10%

Portfolio A;

Expected rate of return = 9.1%

Beta (B) = 0.7

Standard deviation (s) = 27%

Portfolio B;

Expected rate of return = 12.1%

Beta (B) = 1.7

Standard deviation = 48%

Required rate of return for both portfolios;

Rf + B × (Rm - Rf)

Portfolio A :

5% + 0.7 ×(10% - 5%) = 5% + 0.7 × (5%)

5% + 3.5% = 8.5%

Portfolio B :

5% + 1.7 ×(10% - 5%) = 5% + 1.7 × (5%)

5% + 8.5% = 13.5%

A) Alpha(A) of Portfolio A and B ;

A = Expected return - Required return

Alpha of portfolio A :

9.1% - 8.5% = 0.6%

Alpha of Portfolio B:

12.1% - 13.5% = - 1.4%

B.) Sharpe measure for portfolio A and B;

Sharpe ratio = (Expected rate of return - Rf) / s

Portfolio A = (9.1% - 5%)/27% = 0.1519

Portfolio B = (12.1% - 5%)/48% = 0.1479

I will choose Portfolio A

Which of the following statements is true about financial planning?

B) You must always consider the tax consequences of selling your investments.

Answer B is the best choice for the question because you must always considered the tax consequences when selling investments. Investments are always taxed whether it be initially or at the time of sale and that needs to be kept in mind if selling under value especially. You are recommended to check your financial plans often to make sure they are aligning with your goals.