Assume that the investment possibilities are Stocks (S) and Bonds (B). Stocks have an expected return of 10% and a standard deviation of 18%. Bonds have an expected return of 4% and a standard deviation of 8%. The correlation coe cient between Stocks and Bonds is 20%. The return on the risk-free asset is 2%. Investors may borrow or lend at the risk-free rate.

a. Compute the the Sharpe Ratio of a portfolio that consists of 50% Stocks and 50% Bonds.

b. Compute the composition of the optimal portfolio of Stocks and Bonds.

c. Compute the composition of the minimum-variance portfolio of S and B.