Suppose there are two stocks, A and B, and you are a mean-variance optimizer with coefficient

of risk aversion A = 1. You estimate your single index model and find stock A has = -0.02, , and Stock B has = 0,= 1, and . These are the only two risky assets you can invest

in, as well as a risk-free asset. The market index has expected return 8% and variance 0.10. The risk-free

rate is 2%. Recall the optimal allocation from Modern Portfolio Theory is given by