1. Consider two asset classes: US Equities and Corporate Bonds. US Equities has the expected return of 13% and the return standard deviation of 15%. Corporate Bonds the expected return of 5% and the return standard deviation of 7%. The correlation between the two returns is 0.25. The risk free rate is 3%.

a. Please describe the tangency portfolio. What are the allocations between equities and bonds? What is the return and the return standard deviation of the tangency portfolio? (4 points) (you can use excel to get the tangency portfolio)

b. Walter is quite risk averse. He would like to have an investment portfolio with the standard deviation of 7%. Please describe the optimal asset allocation for Walter: What are the weights of the risk free asset, equities and bonds? What is the expected return of Walters portfolio? (4 points)

c. Nancy would like to earn an expected return of 13%. Please describe the optimal asset allocation for Nancy: What are the weights of the risk free asset, equities and bonds? What is the standard deviation of Nancys portfolio? (4 points)