1. You are trying to plan your investments for the next year. You have decided that the market will either be strong (a bull market), weak (a bear market) or normal. You think that stocks, bonds, and bills will earn the following returns in these scenarios: Scenario Bull market Normal market Bear market

(e) If you combine bonds and bills, what is your optimal combination? What is your expected return? What is your portfolios volatility?

(f) If you combine stocks and bonds, what is your optimal combination? What is your expected return? What is your portfolios volatility?

(g) If you combine all three assets in your portfolio, what is your op- timal combination? What is your expected return? What is your portfolios volatility?

Scenario	Probability	Stock return	Bond return	Bill return
Bull market	0.20	0.25	0.06	0.03
Normal market	0.55	0.10	0.03	0.03
Bear market	0.25	-0.15	0.02	0.03