An investor constructs an optimal-portfolio P with two risky stocks X and Y. The expected rate of return of stock X is 15% and standard deviation is 25% and expected return of stock Y is 12% and standard deviation is 20%. The risk-free rate is 5%. The correlation coefficient between the stocks is 0.15. The optimal-portfolio weights of X and Y are 67.04% and 32.96% respectively.

1. Compute the expected return and standard deviation of the optimal portfolio. (5 points)

2. If the investor wants an expected return of 18% from a complete-portfolio C formed by using the optimal-portfolio P and risk-free rate, what proportion of X, Y, and risk-free asset should the investor invest in the complete portfolio? (5 points)

Problem 2 (Continued)

3. What is the standard deviation of the above complete-portfolio C that provides 18% return?

(5 points)

4. What are the reward-to-risk ratios of the optimal-portfolio P and the complete-portfolio C? Explain your results. Why they are same or different. Provide an argument by reflecting on the capital allocation line/s on which the positions of C and P can be plotted. (5 points)