1. Let us suppose that there are two risky assets that you are planning to combine with the risk-free asset to form a portfolio. You are a risk-averse mean-variance investor. Asset E(r) A 0.15 0.2 B 0.14 0.2 risk-free 0.05 0 1. Draw separate Capital Allocation Lines (CALs) for assets A and B on the same plot. If you are only allowed to use either asset A or B, but not both together with the risk-free asset, which should you choose? Why?

2. Now, we want to consider portfolios that potentially contain both assets A and B. Denote w to be the proportion of the portfolio invested in asset A and (1 w) to be the proportion invested in asset B. Calculate the expected return and variance of your portfolio as a function of w. Assume that Corr(rA, rB ) = 0.2.