Question: Scenario Probability Return on stock A Return on stock B 1 .25 5% -10% 2 .5 10% 15% 3 .25 -10% 20% Assume that the

Scenario	Probability	Return on stock A	Return on stock B
1	.25	5%	-10%
2	.5	10%	15%
3	.25	-10%	20%

Assume that the risk-free rate is 3%.

1 Suppose the tangency portfolio on the efficient frontier has an expected return of 7%. Please solve for the optimal weights of the tangency portfolio. For the answer to this question, write only the weight the tangency portfolio has on stock A.

2.1 What is the risk to volatility ratio (Sharpe Ratio) of stock A?

2.2 What is the risk to volatility ratio (Sharpe Ratio) of the tangency portfolio?

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