1. Suppose you have a plan to invest in a risk-free asset and a portfolio of risky assets. The risk-free rate is 0.075. First, you want to select one portfolio from 5 different portfolios of risky assets, each portfolio of risky assets contains mortgage-backed securities (MBS) and equities. Following table shows each portfolios correlation between returns of MBS and equities.

	Portfolio 1	Portfolio 2	Portfolio 3	Portfolio 4	Portfolio 5
Correlation	0.1	0.3	0.55	0.68	-0.5

Returns characteristics of MBS and equities are as follows

Expected return from MBS	0.15
Expected return from equity	0.28
Standard deviation of MBS returns	0.21
Standard deviation of Equity returns	0.3

a) With the goal of minimizing risk, complete the following table

	Portfolio 1	Portfolio 2	Portfolio 3	Portfolio 4	Portfolio 5
Covariance (MBS returns, equities return)
Optimal weight of MBS
Optimal weight of equities
Expected return
Standard deviation of portfolio returns
Sharpe ratio

(5 points)