Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 12% and 16%, respectively. The beta of A is 0.7, while that of B is 1.4. The T-bill rate is currently 5%, whereas the expected rate of return of the S&P 500 index is 13%. The standard deviation of portfolio A is 12% annually, that of Bis 31%, and that of the S&P 500 index is 18%.
a. Calculate the alphas for the two portfolios. (Round your answers to 1 decimal place.)
b. If you could invest only in T-bills and one of these portfolios, which would you chose?
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