An investor is evaluating the performance of two actively managed mutual funds, A and B

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An investor is evaluating the performance of two actively managed mutual funds, A and B. The annual risk-free rate of return over the period was 4%, and the average annual return of the market portfolio was 12%. The standard deviation of the market portfolio returns was 20%. The table below reports the statistics and the regression estimation results of the single-index model for annual excess returns of the two funds.

	Fund A	Fund B
Average annual excess return	10.6%	8.4%
Standard deviation of annual excess returns	31%	20%
Single-index model estimates	1% + 1.2 (RM-rf)	2% + 0.8 (RM-rf)
Standard deviation of the model residuals	22%	9%

a) The investor currently invests all of his money in the market-index fund and would like to change his asset allocation by including some investment in either fund A or fund B. Which fund should he choose? Explain your answer briefly. 

b) The investor is choosing fund A or fund B to become part of his actively managed stock portfolio. Which fund should he choose? Explain your answer briefly.