e. Suppose your risk–return trade-off function, or indifference curve, is tangent to the efficient set at the point where ^rp = 18%. Use this information, together with the graph constructed in part

d, to locate (approximately) your Security A Security B PA rA PB rB 0.1 −10.0% 0.1 −30.0%

0.2 5.0 0.2 0.0 0.4 15.0 0.4 20.0 0.2 25.0 0.2 40.0 0.1 40.0 0.1 70.0

^r A = ? ^rB = 20.0%

σA = ? σB = 25.7%

964 Part 10: Advanced Issues optimal portfolio. Draw in a reasonable indifference curve, indicate the percentage of your funds invested in each security, and determine the optimal portfolio’s σp and ^rp. (Hint: Estimate σp and ^rp graphically; then use the equation for ^r p to determine wA.)