2 MPT with Two Risky Assets You have recently inherited $150,000 and have decided that you should invest the money. You have identified three funds which seem like a good fit for your investment goals: a risk free short-term bond fund (f), a long-term bond fund (B), and a stock market index fund (S). Your research revealed the following information about the 3 funds: 1 Expected Return: E(r) Volatility: o(r) Risk-Free Fund (f) 0.035 0.000 Long-Term Bond Fund (B) 0.060 0.075 Stock Market Index Fund (S) 0.110 0.18 Correlation between B and S: Pes = 0.75 (a) First you consider investing 1/3 of your inheritance in each of the 3 funds. What is the expected return and volatility of this portfolio? (b) Having taken the first two weeks of Fin-532, you know that you can construct a more efficient portfolio than simply putting an equal weight of your inheritance in each fund. You start by constructing the Mean-Variance Efficient (MVE) portfolio. (i) What are the portfolio weights in the MVE portfolio? (ii) What is the expected return and volatility of the MVE portfolio? (c) After considering your investment goals and risk tolerance, you've decided to make sure your portfolio volatility is no greater than 12%. Given this restriction, how should you allocate the inheritance between (f, B, and S) to maximize your expected return? 2 MPT with Two Risky Assets You have recently inherited $150,000 and have decided that you should invest the money. You have identified three funds which seem like a good fit for your investment goals: a risk free short-term bond fund (f), a long-term bond fund (B), and a stock market index fund (S). Your research revealed the following information about the 3 funds: 1 Expected Return: E(r) Volatility: o(r) Risk-Free Fund (f) 0.035 0.000 Long-Term Bond Fund (B) 0.060 0.075 Stock Market Index Fund (S) 0.110 0.18 Correlation between B and S: Pes = 0.75 (a) First you consider investing 1/3 of your inheritance in each of the 3 funds. What is the expected return and volatility of this portfolio? (b) Having taken the first two weeks of Fin-532, you know that you can construct a more efficient portfolio than simply putting an equal weight of your inheritance in each fund. You start by constructing the Mean-Variance Efficient (MVE) portfolio. (i) What are the portfolio weights in the MVE portfolio? (ii) What is the expected return and volatility of the MVE portfolio? (c) After considering your investment goals and risk tolerance, you've decided to make sure your portfolio volatility is no greater than 12%. Given this restriction, how should you allocate the inheritance between (f, B, and S) to maximize your expected return