Consider the following four stocks:

	Stock Expected Return (E[r])	Standard Deviation
A	0.12	0.30
B	0.15	0.50
C	0.21	0.16
D	0.25	0.21

1. According to the mean-variance dominance principle, which stock a rational and risk-averse investor will choose from stocks A, B and C? How does this choice compare with stock D?
2. An investors risk preferences are characterized by the following utility function:

U=E(r)-0.5A²

Assume that for this investor: A=4. Based on this utility function, should the investor select stock C or stock D?

3. Besides the four risky assets, now the investor can also invest in a newly issued T-bill with annual rate of return at 5%. With risk-aversion level at A=4, the investor is considering to hold a portfolio of the stock (the stock that you picked from part 2) and the risk-free assets, instead of just holding the stock alone. Is this a wise decision for the investor? Why or why not. If so, how will the investor allocate between the stock and risk-free assets?