Question 3 (50 Points) 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.

(5 pts) What is the Sharpe ratio of the pure stock portfolio (E)? Does the reward-risk ratio on portfolio P differ from the reward-risk ratio of portfolio E?

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Question 3 (50 Points) 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.

(5 pts) What is the Sharpe ratio of the pure stock portfolio (E)? Does the reward-risk ratio on portfolio P differ from the reward-risk ratio of portfolio E?

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Question 3 (50 Points) Assumed market conditions There are only two assets in the world. Stocks have an expected return of 8% and standard deviation

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