(a) Given the T-bill rate is 2%. Calculate the weight in stock fund, expected return and standard deviation of the optimal risky portfolio. (6 marks)

(b) Calculate the Sharpe ratio for the optimal risky portfolio. (2 marks)

(c) Draw the capital allocation line (CAL) on the diagram and Show the position of the optimal risky portfolio on the CAL. (2 marks)

(d) Suppose an investor decides to invest in the optimal risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have an expected rate of return of 7%.

a. What is the proportion y? (2 marks)

b. What is the standard deviation of the investors portfolio? (2 marks)

The following table presents the performance of stock and bond funds under various scenarios. Scenario Rate of return of Probability Rate of return of stock fund (%) bond fund (%) Severe recession 0.1 -35 -6 0.2 -10 13 Mild recession Normal growth 0.5 15 6 Boom 0.2 40 -2