Ada is a college junior, and her father gave her $100,000 for her 21st birthday. She is planning to put the money on the stock market. There are several options: treasure bill is risk-free with 5% return(Rf=5%); asset A is an investment on domestic business has an expected rate of return of RA=15% and a std. dev. of 5%. Assume Ada is planning to put xA percent of her money in asset A.

Q1. Asset B is a business in Brazil which as an expected rate of return of RB=30%, and a std. dev. of 10%. Assume Ada can only invest in one risky asset A or B at a time. Which asset you would recommend her to invest, Why?

Q2. Adas utility function is U=Rx-3sx, where sx is the std. dev. of returns. How much she should invest in risk-free asset and how much she should invest in asset A or B? (Hint: How many additional rate of return Ada expect to receive for 1% more risk)