1. This question deals with the optimal portfolio choice for an investor with mean-variance preferences in a world with two risky securities A and B, and a risk free asset, F. Security A offers an expected return of 2% and has a standard deviation of return of 2%. Security B has expected return and standard deviation of 9% and 7%, respectively The correlation coefficient between securities A and B is -0.5. The investor can also borrow and lend at a risk free rate of 1% per month a. Compute and plot the expected return and standard deviation combinations that the investor can achieve by combining securities A and B into a portfolio b. What is the optimal portfolio of risky assets for the investor in such a world? c. Does the optimal portfolio of risky assets in (b) depend on the risk preferences of the investor? Why or why not? d. Suppose that the investor's preferences are represented by the utility function U Er) Ao2, where A is an index of the investor's risk aversion. Furthermore, suppose that A 5. How should the investor allocate his wealth between the optimal portfolio of risky assets computed in (b) and the risk free asset? What is the Sharpe ratio (reward-to-volatility of the investor's e. complete portfolio obtained in (d)? f. How does the answer to (d) change if A 1? g. Interpret the difference in results between (d) and (f