Show steps of your calculations. You have following two stocks to consider:

(E[r])Std. Dev.

A0.210.16

B0.250.21

Besides the two stocks, there are newly issued T-bills at the rate of 5% can be purchased on the market.

1) An investor's risk preferences are characterized by the following utility function:

U=E(r)-0.5A²

Assume that for this investor: A=4. The investor is considering building a portfolio consisting of one of the stocks (A or B) and the T-bills. Based on the information you have, which stock you would recommend to the investor to construct the portfolio? Show your calculations and/or explanations.

2) Now there is another investor with A=2. S/he is also considering constructing a portfolio with either of the stocks and the T-bills. Which portfolio would you recommend to the new investor? Offer some explanations if the recommendation is (or isn't) different than that of the investor in part 2). Show your calculations and/or explanations.