Turn back to Table 6.3 and consider these three-year strategies: Three-In (fully invested in the risky portfolio in each of the three years); One-In (fully invested in the risky portfolio in one year, and in the risk-free asset in the other two); and Third-In-Three (one third of the portfolio invested in the risky portfolio and the remainder in T-bills in each of the three years).
TABLE 6.3: Two-year risk premium, variance, Sharpe ratio, and price of risk for three strategies

a. Which strategy has the lowest Sharpe ratio?
b. Which strategy provides the highest price of risk?
c. Suppose your risk aversion coefficient is A = 2, the expected return on the risky portfolio is 10%, the standard deviation of the risky portfolio is 20%, and the T-bill rate is
4%. If you were allocating your complete portfolio in any year between Three-In and T-bills, what fraction would you devote to Three-In?
d. If you were allocating your complete portfolio in any year between Third-In-Three and T-bills, what fraction would you devote to Third-In-Three?
e. Is there any difference in the complete portfolios that you find in parts (d) and (e)?
f. Is the rational allocation to the risky portfolio for a one-year investor any different than it is for a longer-term three-year investor? In other words, does "time diversification" imply that long-term investors should devote a higher fraction of their investment budget to the risky portfolio?

Two-In' One-In? Half-in-Two3 Strategy: Risk premium Variance R+R= 2R o? + o? = 20? 0 +R = R 0 + o? = o? 2 x R = R 2 x o? = o?/2 Sharpe ratio R/o = S, 2R = S,V2 ov2 = S,V2 %3D Price of risk5 R/a? = P, R/a? = P, 2P, o?/2 %3D