Assumed market conditions There are only two assets in the world. Stocks have an expected return of 8% and standard deviation of 25%; T-bills are risk-free and return 5% per year. Assume that the stock and T-bill returns shown at the outset are normally distributed. Also, assume that the investor has a mean-variance utility function with a risk aversion parameter of A = 2.

Question: Does the investor with A = 4 pick a complete portfolio with a greater or lesser weight on stocks than the investor with A = 2? Would the equity premium be higher or lower if all investors have A = 4 (as compared to A = 2)?