Assume that the assumptions underlying the CAPM hold and that the yield to maturity of short-term German government bonds is 5% (risk-free rate). The expected return of the market portfolio is 15% and its standard deviation is 20%.

1. (6 points) Fabrizio wants to invest $100,000 in a portfolio with as high an expected return as possible but with a volatility of at most 10%. After doing some research, he found the Pacific Fund, a mutual fund that yields an expected return of 9.5% and has a volatility of 10%. Explain to Fabrizio why investing in this fund is not a good idea.