4.1. You are an investment manager, and can combine a risk-free T-Bill which earns 2% (which

you can either buy or short) with a single risky asset. You only care about the mean and the

standard deviation of your portfolio. You can choose your single risky asset from two alternatives

A stock index, with an expected return of 9% and a standard deviation of 25%

A bond index, with an expected return of 6% and a standard deviation of 12%

a) Which risky portfolio would you choose, and why?

b) Suppose that your client wants a volatility equal to 25%. Show numerically how you can

satisfy the clients request without changing your choice of risky asset.