A friend of yours tells you that she has her money invested in the risk-free asset, but she wants to increase

the riskiness of her portfolio to gain a higher expected return. Her financial advisor recommends that she

invests her money in either of the following two funds. The first is an aggressive fund that invests 90% in

riskier stocks and 10% in less risky stocks. The second is more conservative and invests 40% in the same

risky stocks and 60% in the same less risky stocks. You run your own analysis and find that both funds are

on the mean-variance efficient frontier of risky assets, with the aggressive fund being much more to the

right on the frontier compared to the more conservative fund.

b. Your friend is willing to bear more risk than the one of the conservative fund, and the advisor suggests

that, since both funds are on the efficient frontier of risky assets, she should create a new portfolio mixing

with 50% weights the conservative and the aggressive fund to find an intermediate solution that best fits

her risk profile. Would you agree? Why?