The common shares of Almond Beach Ltd., have a beta of 0.75, offer an expected return of 9%, and have an historical standard deviation of return of 17%, alternatively, the common shares of Palm Beach Inc. have a beta of 1.25, offer an expected return of 10%, and have an historical standard deviation of return of 13%. Both firms have a marginal tax rate of 37%. The risk-free rate of return is 3% and the expected rate of return on the market portfolio is 9½%.

a. Would a well-diversified investor prefer to invest in the shares of Almond Beach or the shares of Palm Beach? Explain why and show all calculations.

b. Would an investor who can invest in the shares of only one firm prefer to invest in the shares of Almond Beach or the shares of Palm Beach? Explain why.