5)

Consider the following two risky assets and the portfolio formed by investing 80% in ABC, 20% in XYZ. ABC and XYZ have a correlation of -0.4. NOTE: This problem continues on the next page.

1. a) Find the expected return and standard deviation of the minimum variance portfolio.

2. b) Graph and label your answer for part (a) the minimum variance portfolio, on the graph on the next

   page. Note ABC and XYZ have already been graphed, as well as the 80 ABC/20 XYZ portfolio.

3. c) Sketch and label the investment opportunity set generated by the two risky assets.

4. d) Label the efficient frontier of risky assets.

5. e) Suppose the risk-free rate is 4%. Sketch and label the Capital Allocation line of the optimal risky

   portfolio of the two risky assets. (You do not need to calculate the optimal risky portfolio, just show

   it on the graph.)

6. f) Looking at your graph and comparing the optimal portfolio to the minimum variance and 80/20

   portfolio, what do you think are the approximate weights of ABC and XYZ in the optimal portfolio?

Std. Dev Expected Return ABC 22% XYZ 7% Portfolio (80% ABC, 20% XYZ) | 19% 25% 15% 19% Std. Dev Expected Return ABC 22% XYZ 7% Portfolio (80% ABC, 20% XYZ) | 19% 25% 15% 19%