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    Portfolio to include

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    If I currently hold the S&P 500, should I add either A or B to my portfolio? Why?

    RoR Beta SD
    Portfolio A 12.00% 0.7 12.00%
    Portfolio B 16.00% 1.4 31.00%
    T-Bills 5.00%
    S&P 500 13.00% 18.00%

    ROR: Rate of return
    SD: Standard deviation

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    Solution Preview

    Since you hold S &P (diversified portfolio) beta (systematic risk) is important and not standard deviation (total risk).
    T - Bills return is the risk free rate. S &P 500 is the market rate of return

    Let us find the required return on portfolios A and B using CAPM

    CAPM ...

    Solution Summary

    This solution explains which portfolio to include if one already holds S&P 500.