Assume that you have the following hypothetical data on assets: the risk-free rate is 3%; the expected return on the investor’s optimal (tangency) portfolio is 10% and the risk of the tangency portfolio is 18%. Now answer the questions below (which are related to the capital allocation line).

a. How much extra return does the investor want per unit of risk in order to invest in the risky asset?

b. Assume the investor requires a risk level for the portfolio of 14%. What fraction of assets should he invest in the optimal portfolio and what would be its expected return?

c. What expected return should the investor demand for a portfolio with standard deviation of 25%? Discuss the result.

d. What would be the investor’s optimal mix of risky portfolio and the risk-free rate so he can have a portfolio with an expected return of 15%?

e. Related to part (d), if the investor has $100,000 to invest what fraction of it must he borrow (at the risk-free rate) to have a portfolio with an expected return of 15%?