2.1 Anna Smith creates her first portfolio and invests in two assets, T-bills and an index fund that closely tracks the FTSE100 index. The return on the T-bills is 4%. The expected return on the index fund is 18% and the standard deviation is 20%. (a) Draw the Capital Market Line (CML) and mark the point where the investment in the index fund is 65%. (b) Determine the risk and return at that point (65%). (3 marks) (a) Plot the new leverage (borrowing) portfolio on a graph. (b) Calculate the expected risk and return on Anna's new investment. (6 marks) 2.2 Anna, after having a successful year of managing her investment, decides to create a leveraged portfolio. She accepts the higher risk of such portfolio because she believes that the market will generate attractive returns in the next few years. Anna approaches her broker to borrow money against securities she holds in her portfolio. The broker's rate for lending to clients is 6 percent. The risk-free (T-bill) rate is 4%. Assuming that she can achieve the same return of 18% on the index fund with a standard deviation of 20%, she borrows 25% of her initial investment and invests all in the index fund. (3 marks) (6 marks) 2.3 (a) Compare, and briefly, discuss the risk and return for the two portfolios in 2.1 and 2.2. (3 marks) (b) What is the slope (on the graph) of the 1st unleveraged portfolio and the slope (on the graph) of the 2nd leveraged portfolio? Discuss your results. (6 marks) 2.4 Investors have different views of the market, and different levels of risk aversion, which means that the individual risky assets (e.g. securities) they choose to form their portfolio are different. Combining the capital allocation line with an investor's indifference curve leads to different optimal risky portfolios.