You are on the board of the Springfield College Endowment Fund (SCEF), which is evaluating two potential managers for its investments: Mr. Monty Burns (MB) and Mr. Waylon Smithers (W S). The expected returns on portfolios MB and W S are 11% and 14%, respectively. The beta of MB is 0.8 while that of W S is 1.5. The T-Bill rate is 7%, while the expected return of the market index is 12%. The standard deviation of portfolio MB is 10%, while that of W S is 31%, and that of the index is 20%.
1. Suppose SCEF currently holds a market index portfolio. Based on the data, would you add portfolios MB and/or W S to SCEF’s mix of holdings?
2. If SCEF were ordered to invest only in T-Bills and one of the portfolios MB or W S, which portfolio should SCEF invest? Why?
