1. An investor can design a risky portfolio based on two stocks, A and B. Use the following scenario:

State of the Economy	Probability	Stock A return	Stock B return
Boom	0.30	30%	-6%
Normal	0.50	18%	12%
Bust	0.20	-5%	6%

The t-bill rate of return is 4.25%.

a) The proportion of the optimal risky portfolio that should be invested in stock A & B is what?

b) The expected return on the optimal risky portfolio is what?

c) The Sharpe ratio of the optimal risky portfolio is what?

d) Investor wants to have an expected return of 8% for a complete portfolio. What proportion of his investment is in the complete portfolio (risk free, stock A and B)?

e) Investor wants the highest expected return with a complete portfolio that has a standard deviation of 12%. What proportion of his investment is in the complete portfolio (risk free, stock A and B)?