4) 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

Great 0.20 35% 4%

Good 0.40 18% 18%

Bad 0.25 0% 0%

Bust 0.15 -10% -2%

The t-bill rate of return is 4.5%.

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)?