7. (20pts) Consider two risky assets A and B with their expected one-year return and annual volatility as follows. Their correlation is 0.4. The annual risk-free rate is 1% and your investment time horizon is 1 year. (1) (5pts) Suppose that you can only choose one asset to form a portfolio with the risk-free asset. Which one do you choose and why? (2) (7pts) Suppose that you want to have a portfolio consisting of A and B only. You demand at least 8% for the expected return. Among all possible combinations of A and B with expected return at least 8%, what is the minimum variance portfolio? Find out the weight for A and B, the portfolio's expected return and volatility. (3) (8pts) Suppose that you demand 8% for the expected return. Find out the complete portfolio consisting of A,B and the risk-free asset that meets this requirement (give the weight of each asset and the portfolio's volatility). Is it better or worse than the portfolio found in (2)