Question: if investors are varianceaverse they hold the market portfolio which...

If investors are variance-averse they hold the market portfolio, which predicts that 𝐸𝑟𝑖 − 𝑟𝐹 = 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 ∗ 𝐶𝑜𝑣(𝑟𝑖 , 𝑟𝑀) , where 𝐸𝑟𝑖 is the expected return on stock 𝑖; 𝑟𝐹 is the risk free return; and 𝐶𝑜𝑣(𝑟𝑖 , 𝑟𝑀) is the covariance between the return of the stock and the return on the market index. Suppose the stock market consists of only 2 stocks A and B and a risk-free asset. Let 𝐸𝑟𝐴 = 10%; 𝐸𝑟𝐵 = 8%; 𝑟𝐹 = 4%; the variance of A is 𝑉𝑎𝑟(𝑟𝐴 ) = 0.20; the variance of B is 𝑉𝑎𝑟(𝑟𝐵) = 0.15; and the covariance between A and B is 𝐶𝑜𝑣(𝑟𝐴, 𝑟𝐵) = 0.40. What is the composition of the market index?